museums and the tax collector: the tax treatment of
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MUSEUMS AND THE TAX COLLECTOR: THE TAX
TREATMENT OF MUSEUMS AT THE FEDERAL,
STATE, AND LOCAL LEVEL
Leila John
TABLE OF CONTENTS
INTRODUCTION .......................................................................................... 878 I.MUSEUMS IN AMERICA ........................................................................... 880
A. The Role Museums Play—Education and Entertainment ....... 880 B. Museum Operating Income and Funding ................................ 883
II.FEDERAL TAX EXEMPTION OF MUSEUMS .............................................. 886 III.MUSEUM OPERATIONS THAT HAVE RAISED CRITICISM OF MUSEUM
TAX EXEMPTION ............................................................................. 893 A. Gift Shops and Retail Outlets .................................................. 894 B. Dining Facilities ...................................................................... 896 C. Blockbuster Exhibits ............................................................... 897 D. Lending .................................................................................... 898 E. Renting Museum Property and Ticketed Events ..................... 899 F. Property Holdings .................................................................... 900
IV.THE COMMERCIALITY DOCTRINE......................................................... 901 V.STATE AND LOCAL TAX EXEMPTION ..................................................... 903 VI.PAYMENT IN LIEU OF TAXES ................................................................ 909
A. PILOTs in Boston .................................................................... 913 B. Will Many Museums be Affected by Future
Implementation of PILOTs? .................................................... 916 CONCLUSION .............................................................................................. 920
J.D. Candidate, University of Pennsylvania Law School, 2013. The author would like to
thank Professor Sharon Neill Lorenzo for her guidance and advice during the writing
process and Andras Kosaras for his comments and feedback. The author would also like to
thank the editors of the University of Pennsylvania Journal of Business Law for their editing
and feedback.
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INTRODUCTION
Every spring, anticipation builds in advance of the annual Costume
Institute Exhibition and Gala Benefit at the New York Metropolitan
Museum of Art (“Met”). Last spring was no different. In May 2012, the
Met launched Schiaparelli and Prada: Impossible Conversations, a series
of “simulated conversations” between famed designer Miuccia Prada and
the deceased Elsa Schiaparelli.1 Before the doors opened to the public,
however, the exhibit kicked off with the Costume Institute Gala Benefit
hosted by Anna Wintour, the Editor-in-chief of Vogue. The gala is a key
fundraising event for the Costume Institute, with tables priced at $150,000,
and individual tickets selling between $5,000 and $15,000.2 Organizers
hoped that last year’s Schiaparelli-Prada exhibit would be as popular and
profitable as 2011’s exhibit on the works of the late designer Alexander
McQueen.3 The McQueen exhibit proved to be one of the Met’s most
successful events, raising $10,000,000 at the Costume Institute Gala, and
millions more from the increased admission fees and gift store sales.4
Lavish parties, six-figure donations, and high revenue streams at famed
museums, like the Met, have drawn attention to the commercial nature of
such museums despite their being nonprofit and tax-exempt organizations.5
The City of Boston recently increased its requests for payments in lieu
of taxes (“PILOTs”) from cultural institutions and nonprofits.6 PILOTs are
negotiated voluntary payments made to municipalities by certain tax-
exempt nonprofits.7 PILOTs help cover the cost of municipal services
1. Press Release, The Metro. Museum of Art, Elsa Schiaparelli and Miuccia Prada’s
Impossible Conversations at Metro. Museum’s Costume Inst. (May 7, 2012),
http://www.metmuseum.org/about-the-museum/press-room/exhibitions/2012/schiapa
relli-and-prada-press-release; see also Suzy Menkes, In Conversation: Miuccia and
‘Schiap’, INT’L HERALD TRIB., Feb. 25, 2012, at 13 (describing the exhibit).
2. See Amy Larocca, The Charity Ball Game, N.Y. MAG., May 21, 2005,
http://nymag.com/nymetro/shopping/fashion/features/11894/ (noting that “[t]he money
raised from the sale of tickets . . . constitutes the Costume Institute’s entire annual budget”).
3. See Eric Wilson, McQueen’s Final Showstopper, N.Y. TIMES, July 31, 2011, at
ST1 (discussing the success of the McQueen exhibit).
4. Id.
5. See, e.g., Anna Somers Cocks, Loan fees risk killing the goose that lays the golden
eggs, THE ART NEWSPAPER (July 27, 2008), available at http://www.theartnewspaper.com/a
rticles/Loan-fees-risk-killing-the-goose-that-lays-the-golden-eggs/8663 (pointing to the fact
that museums are tax-exempt for having certain charitable goals yet have expensive
restaurants and stores and lavish parties, and suggesting that museums engaged in such
activities forget their actual purposes of education).
6. Erica Cooke, This is not a tax, says Boston’s Mayor, ART NEWSPAPER (Jan. 2012),
available at http://www.theartnewspaper.com/articles/This+is+not+a+tax,+says+Boston%E
2%80%99s+mayor/25330. 7. DAPHNE A. KENYON & ADAM H. LANGLEY, PAYMENTS IN LIEU OF TAXES:
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provided to the nonprofit, but are not deemed taxes.8 Such programs have
existed for decades.9 They are now receiving more attention as cities focus
on them as sources of fresh revenue and pressure more large property-
holding nonprofit organizations to make payments.10
The growth of PILOT
programs illustrates the move toward limiting the benefits of tax
exemption.11
The expansion of the Boston PILOT program may
foreshadow future changes in the nonprofit world, and may set a significant
precedent for pressure on large revenue-producing museums to defend and
justify their tax-exempt status.
Due to the massive revenue streams and property wealth of some
famed museums, programs like Boston’s PILOT may impact some
museums at the local level, and higher levels of government could consider
possible changes in the tax treatment of museums, especially the more
profitable institutions.12
Many museums, like the Met, have acquired
worldwide recognition. While these museums fund much of their
operations through private donations, admissions, and membership dues,
they have also leveraged their reputations to pursue various forms of
profitable activities to help finance their operating budgets and enable their
growth.13
In order to explore the tax treatment of America’s museums and
to understand why tax exemption benefits are important for museums, even
profitable museums, this Comment examines museum finances, the role
BALANCING MUNICIPAL AND NONPROFIT INTERESTS 6 (2010), available at
http://www.lincolninst.edu/pubs/1853_Payments-in-Lieu-of-Taxes.
8. Id.
9. See, e.g., Janne G. Gallagher, Charities Under Siege: Trends in the State and Local
Tax Treatment of Charities, SB30 ALI-ABA 69, 85 (1996) (noting that PILOTs date back to
at least 1929 when Harvard first made a payment to the city of Boston).
10. KENYON & LANGLEY, supra note 7, at 7.
11. Id. at 7 (“Two major factors drive the high level of interest in PILOTs around the
country: growing scrutiny of the nonprofit sector, and increasing pressure on municipalities
to find new sources of revenue.”).
12. See Andras Kosaras, Note, Federal Income and State Property Tax Exemption of
Commercialized Nonprofits: Should Profit-Seeking Art Museums be Tax Exempt?, 35 NEW
ENG. L. REV. 115, 175 (2000) (arguing that stricter application of tax exemption principles
should apply to museums, and that although they should not lose tax exemption entirely,
“exacting a fair price for operating their exempt activities as business ventures is entirely
fair”); see also KENYON & LANGLEY, supra note 7, at 7 (“Commercial activity in the
nonprofit sector and news reports scrutinizing the behavior of nonprofit organizations have
raised issues about the nonprofit property tax exemption, and have possibly reduced public
support for it.”).
13. See, e.g., Report of the Chief Financial Officer, THE METRO. MUSEUM OF ART 50
(2011), available at http://www.metmuseum.org/~/media/Files/About/Annual%20Reports/2
010_2011/Chief%20Financial%20Officer [hereinafter Report of CFO] (noting that the Met
receives most of its funding from its endowment, donations and admission fees, but that it
also records revenue from “auxiliary activities” such as restaurants and gift shops).
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museums play in the community, and the purpose and importance of tax
exemption for museums.
In the coming years, it is probable that museums will see increased
scrutiny of their more commercial activities and of their tax-exempt
statuses. Consequently, they may have to defend their tax exemption and
publicize the impact of their charitable activities. Although museums have
not yet been largely impacted by tax reforms, state and local governments
are pushing for stricter limits on tax exemptionmuseums have reason to
be wary of possible changes.14
To fully comprehend the tax-related issues
museums confront, and to determine the likelihood of changes in tax policy
toward museums, Section I of this Comment explores the purpose and
current operations of museums, particularly the large, world-renowned
institutions. Section II briefly explains the federal tax exemption of
museums and addresses the fact that, at the national level, tax exemption is
a settled norm and museums are unlikely to see changes in their federal tax
treatment. Section III considers the tax treatment of the commercially-
driven operations of museums. Section IV discusses the Commerciality
Doctrine and its likely impact on museums, and Section V explores state
nonprofit tax exemptions, which tend to be less uniform, less established,
and more conservative than federal tax exemptions. Museums may find
their tax exemption questioned at the state level based on commercial
activities conducted on exempt property or due to changes within state laws
or policies that tighten the definition of organizations that qualify for tax
exemption. Finally, Section VI discusses the current use of PILOTs for
property tax-exempt nonprofits and the likelihood that museums will be
pressured to make contributions. While much of this Comment applies to
nonprofits in general, this discussion addresses specific and unique issues
for museums, such as improving public perceptions of their charitableness,
the operation of commercially oriented activities, reasons for tax
exemption, and the threat of local requirements for payments in lieu of
taxes.
I. MUSEUMS IN AMERICA
A. The Role Museums Play—Education and Entertainment
The American Alliance of Museums, in its Code of Ethics for
14. See, e.g., Rick Cohen, Packard Museum Struggling to Retain Tax Exemption,
NONPROFIT QUARTERLY (June 12, 2012, 12:57 PM), http://www.nonprofitquarterly.org/polic
ysocial-context/20484-packard-museum-struggling-to-retain-tax-exemption.html
(highlighting a debate about the extent to which a museum’s “non-charitable revenue-
generating activities affect its tax-exempt status”).
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Museums, defines a museum as an institution that “[makes] a ‘unique
contribution to the public by collecting, preserving, and interpreting the
things of this world.’”15
By comparison, the federal government defines a
museum as “a public or private nonprofit agency or institution organized on
a permanent basis for essentially educational or aesthetic purposes, which,
utilizing a professional staff, owns or utilizes tangible objects, cares for
them, and exhibits them to the public on a regular basis.”16
While
museums vary as much as these definitions do in their approaches to
education and preservation, American museums tend to embrace both
missions.
Charles Wilson Peale founded one of the first American public
museums.17
In establishing and heading the Philadelphia Museum, Peale
created a framework for current museum governance.18
Peale promoted
museum access “to both the learned and the unwise.”19
Peale understood
that the promise of education alone rarely attracts many visitors; he
therefore aspired to make “culture not to be difficult and somehow painful,
but fun and uplifting and entertaining.”20
Phineas T. Barnum purchased
Peale’s collection in 1840 and focused on entertainment, thus transforming
the museum experience and marking a distinct change in museum
operation and purpose.21
Barnum opened the American Museum in New
York City, which became a national landmark, amusing and entertaining
visitors with exhibits of “freaks” and novelties alongside collections of arts
and artifacts.22
At the time, the American Museum was praised as having
15. Eugene Dillenburg, What, if Anything, Is a Museum?, EXHIBITIONIST, 2011, at 8,
available at http://name-
aam.org/uploads/downloadables/EXH.spg_11/5%20EXH_spg11_What,%20if%20Anything
,%20Is%20a%20Museum__Dillenburg.pdf (quoting the AAM website). However, the
AAM website page that originally listed this definition has since been taken offline.
16. Id.
17. Liane Hansen, Philadelphia Museum Shaped Early American Culture, NAT’L PUB.
RADIO, July 13, 2008, http://www.npr.org/templates/story/story.php?storyId=92388477.
18. See id. (“[N]ot only did [Peale] create the first museum, but he created the first
marketing campaigns, the first solicitations for gifts to his museum . . . .”).
19. Id.
20. Id.
21. A History of Museums, ‘The Memory of Mankind’, NAT’L PUB. RADIO, Nov. 24,
2008, http://www.npr.org/templates/transcript/transcript.php?storyId=97377145 [hereinafter
A History of Museums]; see also John Richard Betts, P.T. Barnum and the Popularization
of Natural History, 20 J. HIST. OF IDEAS 353 (1959) (suggesting that Barnum should be
credited with making museums a popular form of American entertainment); see also Harold
Skramstad, An Agenda for American Museums in the Twenty-First Century, 128 DAEDALUS
129, 131 (Summer 1999) (noting that the museum governance of Barnum and Peale was a
preface for the evolution of museums in America).
22. See Betts, supra note 21, at 353–-55 (discussing the “novelties” Barnum added to
his exhibits, including animals, such as orangutan and elephants, as well as “pictures,
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“served science and education well.”23
The head of the American Alliance of Museums has suggested that
“[m]useums are a part of the community . . . [but] their role is not well-
understood or well-publicized.”24
Museums have long provided education
to the American populace, and that remains their overarching goal.25
However, most museums also find it necessary for their survival and
success to entertain and amuse as well as to educate. Promoting
entertainment has transformed the reputation of museums to the point
where many no longer “think about museums as being a critical piece in
our educational infrastructure in this country” or realize the community
benefits museums provide.26
“[T]he American museum universe is more like the Milky Way than
the solar system,” therefore making it difficult to generalize the
characteristics of a typical museum.27
Today, so-called “superstar
museums” offer the ultimate museum experience.28
Superstar museums
share certain key characteristics: they draw tourists, attract large numbers
of visitors, exhibit famous works, are located in buildings celebrated for
their unique architecture, and gain revenue from commercial activities
while also benefiting the local economy.29
The Met is one example of a
articles or curiosities.”); KARL E. MEYER, THE ART MUSEUM: POWER, MONEY, ETHICS 92
(1st ed. 1979) (pointing to Thomas Pearsall Field Hoving as another influential figure in the
entertainment archetype because of his “splashy shows, head-line catching acquisitions, and
continuous capital expansion”).
23. Betts, supra note 21, at 357.
24. A History of Museums, supra note 21.
25. See Kosaras, supra note 12, at 118–22 (noting that two of the first American
museum directors, John Cotton Dana and Paul J. Sachs, emphasized the educational goals of
museums, despite disagreeing on strategies to further those goals. Dana saw a museum as
only serving its function if it benefitted the public, and thought that it should be centered in
a metropolis so to educate as many people as possible. On the other hand, Sachs believed
that museums should not serve as “a public playground,” but rather as a place for scholars to
learn and research.).
26. A History of Museums, supra note 21.
27. MEYER, supra note 22, at 58. One important distinction between museums is how
they are operated. According to a 2012 study, approximately sixty percent of museums are
privately operated and forty percent are run by the government, with only seven percent of
these managed by the federal government. The Gale Group, Museums and Art Galleries,
HIGHBEAM BUSINESS, (last visited Apr. 8, 2013), http://business.highbeam.com/industry-
reports/business/museums-art-galleries (noting that most of the museums in the Northeast
are privately operated and that government museums are more common in the South and
West of the United States.). Museum ownership, organization, and funding sources relate to
the type of financial scrutiny museums receive.
28. Bruno S. Frey & Stephan Meier, The Economics of Museums, in HANDBOOK OF THE
ECONOMICS OF ART AND CULTURE 1018, 1035 (Victor A. Ginsburgh & David Throsby eds.,
2006).
29. Id. at 1036–37.
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superstar museum.30
Other examples include the Guggenheim, the
Museum of Modern Art, and the J. Paul Getty Museum (“Getty”). 31
These
museums have followed Barnum’s model, merging entertainment and
education to create famed institutions. However, these same superstar
museums have sparked debates about profit-seeking and tax exemptions.
Due to such attention, superstar museums should consider their public
image and take care not to allow their business-minded operations to
overshadow their charitable and tax-exempt missions in the eyes of the
public, the state, and the local municipality. This Comment focuses on
these “superstar museums” because of their influence and ability to
provoke tax reforms that impact all museums.
B. Museum Operating Income and Funding
There are at least 17,000 museums in America, and they annually host
more than 800 million people for free or at a nominal fee.32
The average
price for admission is about seven dollars, and about one-third of museums
do not charge any admission.33
The median cost to museums per visitor is
about $31.40, which forces museums to allocate part of their operating
budgets toward subsidizing admission.34
Early-era American museums derived their funding from “men of
fortune and estate.”35
Today, the average museum receives 24.4% of its
funding from the federal, state, or local government; 36.5% from private
donations; 27.6% from earned income; and 11.5% from investment
income.36
Corporate donations comprise a substantial proportion of
operating income, but, in the wake of the recession, many corporate and
private donors have reduced their donations to museums.37
Government
30. Id.
31. Id.
32. A History of Museums, supra note 21.
33. Ford W. Bell, How are Museums Supported Financially in the U.S.?, EMBASSY OF
THE UNITED STATES (Mar. 2012), available at http://photos.state.gov/libraries/amgov/13
3183/english/P_You_Asked_How_Are_Museums_Supported_Financially.pdf.
34. Monday Musings: The Price of a Free Membership, CTR. FOR THE FUTURE OF
MUSEUMS (Dec. 3, 2012), http://futureofmuseums.blogspot.com/2012/12/monday-musings-
price-of-free-membership_3.html.
35. Calvin Tomkins, MERCHANTS AND MASTERPIECES: THE STORY OF THE
METROPOLITAN MUSEUM OF ART 21 (1989); see also Bell, supra note 33 (noting that private
donations are the largest source of income for museums comprising about thirty-six percent
of museum operating income, while about twenty-five percent is supported by government
funding).
36. Bell, supra note 33.
37. See Jim Zarolli, Museums Exhibit Signs of Economic Distress, NAT’L PUB. RADIO,
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funding also has declined, as economic downturns left cities unable to
support local museums.38
Furthermore, shrinking endowments have left
many museums in difficult financial positions.39
Since museums “must
stitch together sustainable revenue streams from a range of sources, while
being as much at the whim of the marketplace as for profit enterprises,”
they have been forced to increase attention to profitable activities and
fundraising so as to avoid auctioning collection pieces or shutting down
entirely.40
For a large source of revenue, museums depend on admissions,
membership dues, and retail profits; these sources make up a median of
18% of museum operating budgets.41
Museums, especially superstar
museums, also report modest income-producing endowments.42
The Met, a
superstar museum with a much larger operating budget and revenue stream
than the average museum, stated in its 2011 Annual Report that its revenue
amounted to $226.2 million.43
The Met outlined its sources of revenue as
follows: 37% from its endowment, 22% from gifts and grants, 14% from
admissions fees, 11% from membership dues, 6% from New York City
utilities, 5% from New York City guardianship and maintenance, and 5%
Jan. 5, 2009, http://www.npr.org/templates/story/story.php?storyId=99017732 (discussing
the Queens Museum of Art, which relies primarily on corporate and private donors, who
“have lost a lot of money in the stock market” ). Recently, however, “there are signs that
things are starting to look up” for charities. Pam Fessler, Charities Predict A Slight
Increase in 2012 Donations, NAT’L PUB. RADIO, Jan. 4, 2012,
http://www.npr.org/2012/01/04/144659584/charities-predict-a-slight-increase-in-2012donat
ions.
38. See, e.g., Zarolli, supra note 37 (discussing “the hard-pressed city government[‘s]”
need to cut $400,000 from the budget for the Queens Museum of Art).
39. See András Szántó, Will US Museums Succeed in Reinventing Themselves?, ART
NEWSPAPER (Jan. 2010), available at http://www.theartnewspaper.com/articles/Will-US-
museums-succeed-in-reinventing-themselves-/20030 (stating that museum endowments
shrank greatly during the recession, and that the largest institutions were the most affected).
40. Bell, supra note 33; see also Edward Wyatt, Museum of Contemporary Art Takes
Broad’s Lifeline, Appoints New Chief, N.Y. TIMES (Dec. 23, 2008, 12:09 PM),
http://artsbeat.blogs.nytimes.com/2008/12/23/museum-of-contemporary-art-takes-broads-
lifeline-appoints-new-chief/ (explaining that the Museum of Contemporary Art in Los
Angeles had to be bailed out by philanthropist Eli Broad because, although it has “one of the
country’s most esteemed collections of postwar art. . . .its equally esteemed and ambitious
exhibitions program ha[d] for several years outstripped its financial means, causing the
museum to eat through most of its endowment and land in a deep financial crisis”).
41. Press Release, Am. Ass’n of Museums, AAM Releases Survey-Offers Fin.
Snapshot of Museum Field (Nov. 13, 2006) (on file with the University of Pennsylvania
Journal of Business Law).
42. See Bell, supra note 33 (noting that money from investments tends to comprise
about 11.5% of museum revenue).
43. Report of CFO, supra note 13, at 50.
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from auxiliary activities such as gift shops, parking, and restaurants.44
The
Met’s Annual Report reveals that a large percentage of the institution’s
revenue depends on unstable sources that are heavily linked to the
economy. The Met and similarly situated museums have therefore had to
focus attention on other sources of revenue in order to make up for market
instability in traditional revenue sources.
Although superstar museums report large revenue streams considering
their nonprofit status, most superstar museums also report high operating
costs that correlate with their revenue streams. In 2005, museums allocated
a median of 46% of spending toward meeting their missions, and 9%
toward caring for their general collections.45
Personnel costs amounted to a
median of 51% of museums’ operating budgets.46
The Met reported
operating expenses of $224.9 million in its 2011 Annual Report, a figure
relatively close to its annual revenue.47
The Met spends 29% of its
operating budget on curatorial expenses, 18% on maintenance and
operating services, 17% on guardianship, 11% on administration, 7% on
utilities and interest, 7% on membership and development, 6% on
education and libraries, and 5% on its special exhibits.48
Public misperception regarding museum profits may be at the root of
criticism toward museum tax treatment.49
With media portrayals of
museums as buyers and holders of multi-million dollar pieces, owners of
prime real estate, and employers capable of providing for-profit level
director salaries and perks, it may seem reasonable to assume that superstar
44. Id. Note that revenue from fundraising events, like the previously mentioned
Costume Institute Gala at the Met, is recorded as gifts and donations. See 2010 ANNUAL
REPORT, THE FIELD MUSEUM OF NATURAL HISTORY 8 (2010),
http://fieldmuseum.org/sites/default/files/2010_Annual_Report.pdf (citing the revenue for
the Field Museum in Chicago as $68 million and derived as follows: 17% from long-term
investments, 16% from admissions, 14% from business enterprises, 11% from contributions,
10% from net assets used, 10% from government support, 9% from Chicago Park District,
5% from program service fees, 4% from membership dues, 3% from sponsorships, and 1%
from other sources).
45. AAM Releases Survey-Offers Financial Snapshot of Museum Field, supra note 41.
46. Id.
47. Report of CFO, supra note 13 (the amount cited excludes auxiliary activities).
48. Id.; see also 2010 ANNUAL REPORT, supra note 44 (citing for the year 2010 an
operating budget of $64.7 million for the Field Museum of Natural History with expenses as
follows: twenty-one percent on collections and research, twenty percent on other museum
services, thirteen percent on debt service, twelve percent on exhibitions, nine percent on
business enterprises, seven percent on environment, culture and conservation, six percent on
marketing and public relations, five percent on institutional advancement, four percent on
education and its library, and three percent on administration).
49. But see MEYER, supra note 22, at 59, (noting that “criticism has been directed at
[museum] performance as distinct from their existence,” and that “nearly everybody,
approves of the establishment of museums”).
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museums do not deserve tax exemption. Therefore, in order to avoid
incorrect assessments of wealth, museums need to educate the public on the
costs of collection maintenance and programming because in today’s
unstable economy financial responsibility is vital to a museum’s existence.
Notably, the Met stated that only five percent of its reported revenue was
derived from tangential and more commercially driven activities.50
Nevertheless, people focus on the inflow of money rather than considering
the source or type of revenue, and the substantial costs of running a
museum.
II. FEDERAL TAX EXEMPTION OF MUSEUMS
Both the federal government and each of the fifty states provide tax
exemption for nonprofit organizations that meet certain requirements.51
Tax-exempt museums deny federal, state, and local municipalities a large
source of revenue.52
This untaxed revenue has garnered attention in recent
years as museums and other charitable organizations, such as hospitals and
universities, have drawn criticism53
for transforming into what Andras
Kosaras has termed “commercialized nonprofits.”54
In order to analyze whether museums are likely to be affected by
public pressure it is necessary to understand the basic structure of the
current tax system. Section 501(c)(3) of the Internal Revenue Code (“the
Code”) allows income tax exemption for organizations that meet the
50. Report of CFO, supra note 13; see also Kosaras, supra note 12, at 133-37
(suggesting that museums have organized their finances so as to profit from tax-exempt
activities and to avoid the Unrelated Business Income Tax and arguing that museums have
become more profit-seeking in their tax-exempt activities and should be taxed for those
gains).
51. KENYON & LANGLEY, supra note 7, at 10.
52. See e.g., Keith Schneider, Adding Profits to the Gift Shop, N.Y. TIMES, Mar. 29,
2006, at G31 (noting that America’s museums, which are largely tax-exempt, collectively
amass about $5.9 billion in revenue a year).
53. See KENYON & LANGLEY, supra note 7, at 9 (“increasing public scrutiny has led to
challenges of nonprofits’ tax-exempt status”); see also Sebastian Smee, Masterpieces on
loan leave MFA Walls Lacking; The museum is sharing a glut of its most prized works,
raising funds but frustrating some local supporters, THE BOSTON GLOBE, Nov. 25, 2012, at
A1 (“After all, why should [museums] be deserving of tax-free status, of donations from
businesses and the rich, of being considered superior to ordinary commercial life if they
themselves become so commercial as to rent out their collections?”) (quoting Cocks, supra
note 5).
54. Kosaras, supra note 12. But see Daniel Halperin, Is Income Tax Exemption for
Charities a Subsidy?, 64 TAX L. REV. 283, 289 (2011) (suggesting that income tax
exemption is only relevant when looking at dollars set aside rather than dollars spent on
yearly operating expenses, since such costs are usually deductible).
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“exempt purposes” cited in the provision.55
To qualify as a “charitable
organization” with tax-exempt status, an organization’s mission must
further an approved purpose, either “charitable, religious, educational,
scientific, literary, testing for public safety, fostering national or
international amateur sports competition, [or] preventing cruelty to children
or animals.”56
Museums qualify under section 501(c)(3) because of their
educational purposes.57
To differentiate a tax-exempt organization from a non-tax-exempt
organization, the IRS applies an organizational test and an operational
test,58
based on the requirement that “an organization must be both
organized and operated exclusively for one or more of the purposes
specified in [section 501(c)(3)].”59
To satisfy the test, “the organizational
documents must limit the mission of the organization to one or more
exempt purposes; limit the organization’s power to engage in non-exempt
activities . . . and provide that the organization’s assets must be distributed
for other related exempt purposes upon dissolution.”60
The operational test
focuses on behavior and whether the organization seeking section 501(c)(3)
status operates in a way that meets the exempt purposes listed in the
Code.61
Section 501(c)(3) entities are divided into private foundations and
public charities.62
Public charities receive more favorable tax treatment
55. 26 C.F.R. § 1.501(c)(3)–1 (2013).
56. I.R.C. § 501(c)(3), (last updated Jan. 14, 2013), available at http://www.irs.gov/
Charities-&-Non-Profits/Charitable-Organizations/Exempt-Purposes-Internal-Revenue-
Code-Section-501(c)(3).
57. See Kosaras, supra note 12, at 128 (”The Treasury Regulations specifically qualify
museums for tax exemption as “educational” organizations”); see also Micah J. Burch,
National Funding for the Arts and the Internal Revenue Code §501(c)(3), 37 FLA. ST. U. L.
REV. 303, 332–33 (2010) (suggesting that the Code be revised to specifically provide arts
organizations tax exemption rather than having them fall under the category of an
educational charity, thereby lessening the tension between education and commerciality in
arts organizations).
58. Kosaras, supra note 12, at 128.
59. 26 C.F.R. § 1.501(c)(3)–1; see also Burch, supra note 57, at 326 (noting that there
is a “sliding scale” of commercial activities to charitable activities on which an organization
can fall and that the amount of commerciality allowed while remaining tax-exempt is based
on the charitable purpose of the organization).
60. Kosaras, supra note 12, at 128–29.
61. See id. at 129 (“The test will not be met only if ‘more than an insubstantial part of
its activities is not in furtherance of an exempt purpose.’”) (quoting Treas. Reg.
§1.501(c)(3)-1(c)(1)).
62. Adler & Colvin, Qualifying for Public Charity Status: The Section 170(b)(1)(A)(vi)
and 509(a)(1) Test and the Section 509(a)(2) Test, (2003), available at
http://www.adlercolvin.com/pdf/public_charities/A%20C%20Web%20Resource%20-
%20Qualifying%20for%20Public%20Charity%20Status.%20The%20(00167455).PDF.
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than private foundations, but must qualify for public charity designation
under section 509 of the Code.63
Under the Code, an organization can
qualify as a public charity in three ways: “(1) by being a certain kind of
institution, such as a church, school, or hospital; (2) by meeting one of two
mathematical public support tests; or (3) by qualifying as a supporting
organization to another public charity.”64
Museums are most likely to be
classified as public charities under the public support test.65
The Code prohibits an exempt organization from benefiting any
private shareholder or other individual, and from taking political action,
such as by lobbying for changes in legislation.66
The Code does not
disqualify organizations from tax exemption for profit-seeking activities as
long as the organization’s mission is not commercial.67
However, the IRS
has created an exception in section 513 of the Code, the Unrelated Business
Income Tax (UBIT).68
Section 513 was enacted by Congress in 1950 in
response to complaints of unfair competition by businesses conducting
similar activities as tax-exempt organizations.69
Section 513 defines
“unrelated trade or business” as:
any trade or business the conduct of which is not substantially
63. VIRGINIA G. RICHARDSON & JOHN FRANCIS REILLY, PUBLIC CHARITY OR PRIVATE
FOUNDATION STATUS ISSUES UNDER IRC 509(A)(1)-(4), 4942(J)(3), AND 507 (FY 2003) 2–3,
available at http://www.irs.gov/pub/irs-tege/eotopicb03.pdf.
64. Adler & Colvin, supra note 62 see also Developments in the Law—Nonprofit
Corporations: III. Tax Exemption, 105 HARV. L. REV. 1612, 1616 (1992) [hereinafter
Developments in the Law] (“The law of tax exemption cannot be understood without
interpreting the term charitable. The term implies both a statutory definition of a category
of exempt activities, and a common law requirement that the organization must advance
charitable ends.”); see also Developments in the Law, supra note 64, at 1616 (“[U]nderlying
all relevant parts of the Code, is the intent that entitlement to tax exemption depends on
meeting certain common-law standards of charity—namely, that an institution seeking tax-
exempt status must serve a public purpose and not be contrary to established public
policy.”) (quoting Bob Jones University v. United States, 461 U.S. 574 (1983)).
65. See Internal Revenue Manual 4.76.3, I.R.S., http://www.irs.gov/irm/pa
rt4/irm_04-076-003.html (last visited Apr. 8, 2013) (defining the public support test as
requiring that the organization receive at least one-third of its funding from public
contributions, or, if the organization receives between 10% and 33.33% from public
contributions, facts and circumstances as stipulated by the treasury must show that the entity
is organized and run like a public charity and not a private organization.); Adler & Colvin,
supra note 62 (providing general information about the various tests).
66. See Developments in the Law, supra note 64, at 1618-19 (specifying that any
organization that engages in such activity will not be exempt from taxation).
67. Id. at 1617. Although profit-seeking activities do not disqualify an institution,
income from commercial activity that does not mean that income from the commercial
activity will be entirely untaxed if the Unrelated Business Income Tax provision (section
513) may still apply.
68. I.R.C. § 513 (2006).
69. Kosaras, supra note 12, at 130–31.
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related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501.
70
The UBIT taxes unrelated business income of section 501(c)(3)
entities at corporate tax rates.71
This provision affects profits tangentially
related to a museum’s educational purpose, such as revenue from museum
restaurants or gift shops.72
The UBIT is interpreted and applied broadly,
creating confusion over what constitutes unrelated business income for an
organization’s section 501(c)(3) tax-exempt purpose.73
For this reason, the
government has considered reforms to UBITs.74
Although there have been
no recent formal changes to UBITs, there may be changes in the
application of UBIT as nonprofits become more commercial and it
becomes increasingly difficult for the IRS, and nonprofits, to separate types
of income streams.75
The public, although harboring misconceptions about museum
finances, has increasingly begun to ask why such charitable organizations
are tax-exempt when they receive hefty donations, maintain endowments,
and profit from business-like ventures.76
Some argue that commercially-
driven museums do not deserve the same level of tax exemption as other
charities, citing the amount of earned income such museums seemingly
70. I.R.C. § 513 (2006).
71. I.R.C. § 511 (2006). The top tax bracket for corporations, (taxed at a rate of thirty-
five percent35%, applies to taxable income in excess of $10,000,000. I.R.C. § 11 (2006).
72. Kosaras, supra note 12, at 133.
73. Id. at 171.
74. During the “Hearing on Public Charity Organizational Issues, Unrelated Business
Income Tax and the Revised Form 990” on July 25, 2012, the IRS heard arguments and
suggestions for reform of UBIT. PRICEWATERHOUSECOOPERS, HOUSE OVERSIGHT
SUBCOMMITTEE TAX-EXEMPT HEARING FOCUSES ON COMMERCIAL ACTIVITIES, COMPLEX
STRUCTURES, AND FORM 990 REDESIGN 1 (July, 31, 2012), http://www.pwc.com/en_US/u
s/washington-national-tax/newsletters/exempt-organizations-tax/assets/pwc-hearing-public-
charity-organizational-issues.pdf. At the hearing, John Columbo, a professor at the
University of Illinois College of Law, recommended that Congress “subject income earned
by a public charity from all commercial activities to UBIT, regardless of whether the
activity was substantially related to the organization’s exempt purposes.” Id. at 4.
75. See id. (evidencing the concern over the application of UBIT).
76. See Smee, supra note 53 (“[G]reat lending museums like the MFA ‘risk killing the
goose that lays the golden eggs. After all, why should they be deserving of tax-free status,
of donations from business and the rich, of being considered superior to ordinary
commercial life if they themselves become so commercial as to rent out their collections?’”)
(quoting Cocks, supra note 5). But see Frey & Meier, supra note 28 (suggesting that
museums pursue commercial activities in response to reduced funds from other sources of
revenue).
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receive tax-free, the trend toward commercially-driven activities, and the
notion that tax exemption has become less essential to museum survival.77
These criticisms have developed partly because the IRS has not articulated
why section 501(c)(3) tax exemptions exist in the first place,78
and because
fundamentally, “[t]here is nothing about the nature of the charitable
organization that precludes income taxation. . . . [because it] often intends
to make a profit and its income can be measured in the same way as for-
profit companies.”79
Despite this, nonprofit tax exemption is well-
established at the federal level and is unlikely to be greatly altered.80
Professor Nina J. Crimm suggests that tax exemption is a way for the
government to reward nonprofits for “undertaking the provision of
‘inherently risky’ public goods and services.”81
This public benefit
reasoning “is based on the theory that the government is compensated for
the loss of revenue by its relief from financial burdens which would
otherwise have to be met by appropriations from other public funds, and by
the benefits resulting from the promotion of the general welfare.”82
Subsidy theory suggests that tax exemptions subsidize organizations that
provide a benefit to society, thereby relieving the government from a duty
77. See, e.g., Kosaras, supra note 12, at 155 (arguing that museums should not be fully
tax-exempt, because “museums are moving to a point where profitability is not an incidental
benefit of exempt activities, but the primary goal. . . . If exempt organizations choose to
emulate for-profit firms, they should be taxed like them.”); see also, Cocks, supra note 5
(positing that museums are losing sight of their real purposes).
78. Nina J. Crimm, An Explanation of the Federal Income Tax Exemption for
Charitable Organizations: A Theory of Risk Compensation, 50 FLA. L. REV. 419, 426
(1998).
79. Halperin, supra note 54, at 284.
80. See Developments in the Law, supra note 64, at 1620 (noting that the subsidy
theory is the most accepted view of why nonprofits are tax-exempt). Other theories of tax
exemption for nonprofits include donative theory, income measurement theory, and capital
formation theory. Id. Donative theory suggests that nonprofits should be tax-exempt
because they run on donations. See also Kosaras, supra note 12, at 167 (noting that
donative theory depends on “the proposition that there is near universal agreement that
donative organizations . . . are and should be exempt from taxation.”). Income measurement
theory suggests that nonprofits are tax-exempt because it is difficult to quantify nonprofit
income. Developments in the Law, supra note 64, at 1620. As much museum revenue is
“readily quantifiable,” income measurement theory does not offer a sound explanation for
museum tax exemption. Kosaras, supra note 12, at 166. Capital formation theory, on the
other hand, supports tax exemption because of the limits placed on nonprofits to raise
capital through securities markets. Developments in the Law, supra note 64, at 1620.
81. Crimm, supra note 78, at 420. Professor Crimm also suggests that the logic behind
tax exemption should be considered separately from specific issues of which organizations
should be tax-exempt. Id. at 420.
82. NSFRE GOVERNMENT RELATIONS COMMITTEE, PAYMENTS IN LIEU OF TAXES 2
(1997) [hereinafter NSFRE] (quoting H.R. Rep. No. 1860, 75th Cong., 3d Sess. 19 [938]),
available at http://www.afpnet.org/files/contentdocuments/pilot_position_paper.pdf.
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to provide such services.83
Subsidy theory can be separated into
government burden theory and community benefit theory.84
Government
burden theory proposes that tax exemptions extend to nonprofit
organizations that provide a service that the government would otherwise
be expected to provide.85
In comparison, community benefit theory
suggests that tax exemptions subsidize the activities nonprofits provide that
benefit the community.86
Museums house, preserve, and protect cultural
works and identities—tasks the government would be unable to undertake
without spending billions of dollars. Museums also provide unique public
benefits, including education, entertainment, community activities, and
tourism revenue. The federal government therefore has an interest in
continuing tax exemptions as a subsidy for the benefits provided by
museums.
Commentators point out that the subsidy theory requires
acknowledgement that tax exemptions, as a subsidy, are essentially
government expenditures on nonprofits.87
This raises concerns of resource
scarcity and allocation efficiency, considering that those who are the least
in need of help receive the most support.88
Museums that can raise their
own resources may not seem as worthy of such a discount from the federal
government. These institutions, however, arguably have a broader impact
because of their ability to reach a wider segment of society; by this logic,
the subsidy rationale posits that larger museums do deserve a government
subsidy for providing greater benefits that the government finds valuable.
Such a government tax subsidy can be compared to one of the biggest tax
subsidies—healthcare—which represents a major policy initiative
undertaken through the tax code.89
In the case of museums, the tax subsidy
83. Developments in the Law, supra note 64, at 1620. However, subsidy theory is not a
complete explanation of tax exemption because it does not explain why such a subsidy
needs to be provided through the tax law rather than in other forms. Id.
84. Kosaras, supra note 12, at 166.
85. Id. Kosaras dismisses this theory by claiming that there is no clear relief of
government burdens by museums.
86. Id.
87. See e.g., Developments in the Law, supra note 64, at 1621 (“Critics of tax
expenditures point to the inefficiency of tax expenditures in allocating scarce government
resources.”).
88. Id.
89. See CATO HANDBOOK FOR POLICYMAKERS, CATO INSTITUTE 141–42 (7th ed. 2008)
available at http://www.cato.org/sites/cato.org/files/serials/files/cato-handbook-policymaker
s/2009/9/hb111-14.pdf (noting that employer-provided healthcare that is employer-deducted
and available as an employment benefit is not taxable to the employee, and is the largest
employer tax break and causes the government to lose billions of potential dollars in
revenue); Eric Pianin, Top 10 Tax Breaks that May be Eliminated, THE FISCAL TIMES, Sept.
13, 2012, http://www.thefiscaltimes.com/Articles/2012/09/13/Top-10-Tax-Breaks-that-May
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fosters arts and culture.
Financial support of museums is an accepted governmental activity in
the Western Hemisphere “because of the way in which it affects the quality
of our cultural life . . . [and because] [t]he market on its own fails to
properly account for [the] sociological/political/aesthetic qualities of art.”90
Most countries maintain ministries of culture and provide more direct
national support for the arts.91
In the United States, however, cultural
development is furthered largely through the tax treatment of museums;
because these tax provisions are “tucked away in provisions of the federal
tax code that do not even use the word ‘art,’ they remain somewhat
insulated from . . . discourse regarding arts funding.”92
The United States
promotes both museums and cultural development through tax exemption
laws.93
Although increased scrutiny of nonprofits, and specifically
museums, may lead museums to fear formal calls for tax reform, the
federal government is unlikely to revoke tax exemption, even for the
largest, most well-known museums. To do so would be, in a way, revoking
national promotion of educational programming in the humanities and the
protection of priceless collections.94
-Be-Elimated.aspx#page1 (stating that the foregone revenue to the federal government from
tax subsidies to healthcare totals around $184.4 billion); Developments in the Law, supra
note 64, at 1620 (“Tax expenditures ‘represent government spending for favored activities
or groups, effected through the tax system.”) (citations omitted).
90. Burch, supra note 57, at 310–11.
91. Bell, supra note 33.
92. Burch, supra note 57, at 303; see also Elizabeth Blair, Does U.S. Need a Culture
Czar?, NAT’L PUB. RADIO, (Jan. 16, 2009, 6:00 AM), http://www.npr.org/templates/story/sto
ry.php?storyId=99450228 (noting the government’s disjointed approach to the arts and
culture in the United States); Christopher Beam, What do Ministers of Culture Do?, SLATE,
(June 29, 2007, 6:36 PM), http://www.slate.com/articles/news_and_politics/explain
er/2007/06/what_do_ministers_of_culture_do.html (noting that in the United States, the arts
are largely privately funded and there is little government support compared to abroad).
Other nations tend to support the arts more openly, and “assistance to the arts is a discrete
and visible expenditure in the national budget.” MEYER, supra note 22, at 64. Professor
Micah Burch suggests that tax subsidies as applied in the United States are beneficial in that
they remove the decision-making required in allocating direct funding. Burch, supra note
57, at 321. Note that the United States does maintain the National Endowment for the Arts,
but its budget is much smaller than that of most other countries. For example, “the
government subvention for Italy’s major opera houses is nearly ten times larger than the
annual Arts Endowment working budget.” NAT’L ENDOWMENT FOR THE ARTS, HOW THE
UNITED STATES FUNDS THE ARTS v (2d ed. 2007), available at
http://infousa.state.gov/life/artsent/docs/how.pdf. European nations also offer tax benefits to
the arts but these have tended to not be as large as the tax benefit in the United States.
NAT’L ENDOWMENT FOR THE ARTS, supra note 92.
93. Burch, supra note 57, at 304.
94. Id. at 306 (“[A]rts policy is an important indicator of how the United States
supports creative endeavors generally.”).
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III. MUSEUM OPERATIONS THAT HAVE RAISED CRITICISM OF MUSEUM
TAX EXEMPTION
Museums have two main goals: to educate their visitors, and to obtain
funding.95
Museums may prioritize their duties to educate the public and
protect cultural, artistic, and scientific works, but to fulfill the charitable
aim of education, they must meet their operating budgets. Some argue that
because “[a]rt museums are moving to a point where profitability is not an
incidental benefit of exempt activities, but the primary goal,” they should
not be allowed tax exemption for such activities.96
While profitable
activities may not be directly connected to charitable goals, raising capital
from any source is vital to the furtherance of public benefits and education.
With donations (which once served as the main support for museums) on
the decline, and costs to sustain museum activities and the protection of
priceless pieces on the rise, museums have been forced to tap into other
sources of revenue to stay afloat and to stabilize their budgets.97
Critics of museum marketability and profit-making seem to suggest
that since museums are tax-exempt nonprofits, they must not operate as
businesses or seek revenue. However, the Code realizes the possibility of
profit-seeking nonprofits and allows exempt organizations to run profitable
activities as long as their overall mission remains charitable.98
Revenue
from tangential and commercial activities is funneled back into museum
operations and helps to support museums’ tax-exempt purposes.99
Plus, in
today’s economy, business-minded governance is important in helping
museums meet their funding requirements.
Museums raise capital through profitable ventures such as gift shops,
restaurants, blockbuster exhibits, private events, and loan arrangements.
Such activities are often not captured by the UBIT exception, because
UBIT explicitly excludes unrelated business that is “substantially
related . . . to the exercise or performance by such organization of its
95. Sandra Mottner & John B. Ford, Measuring Nonprofit Marketing Strategy
Performance: The Case of Museum Stores, 58 J. BUS. RESEARCH 829, 829 (2005).
96. Kosaras, supra note 12, at 155. But see Frey & Meier, supra note 28, at 1035
(stating that museums often have to become more commercial to make up for reduced
funding from other sources).
97. Many nonprofits have been forced toward such a model. Organizations like the
Red Cross, the National Alzheimer’s Association, and the Susan G. Komen Fund have held
events and galas with celebrities and expensive tickets to raise revenue toward their
charitable purposes.
98. Developments in the Law, supra note 64, at 1617.
99. Frey & Meier, supra note 28, at 1035.
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charitable, educational, or other purpose or function constituting the basis
for its exemption . . . .”100
Many museums, especially superstar museums,
also own expensive real estate in the center of cities, and, since most are
exempt from property taxes, tax exemption for these valuable holdings also
garners negative attention. It is such aspects that many find difficult to
reconcile with tax exemption and which need to be explored in detail to
determine how much of such activity is actually tax-exempt and whether
that which is not tax-exempt should be.
A. Gift Shops and Retail Outlets
Today, retail outlets have become a common fixture in museums—an
internet search for “museum gift shop” will generate hundreds of links to
gift shops at museums worldwide.101
Museums profit from purchases at
on-site shops, as well as from online and offsite stores, and for superstar
museums revenue can be in the millions of dollars.102
Superstar museums,
like the Museum of Modern Art (MoMA) or the Met, are examples of
institutions that have capitalized on their reputation to launch successful
offsite stores.103
Notably, offsite stores are not property tax-exempt
because offsite stores are seen to have a clear commercial nature that is less
connected to museum operations.104
In its 2011 annual report, the Met
reported revenues of $68,160,000 in income from “merchandising,” but
expenses of $64,153,000,105
while the MoMA reported income from
“auxiliary activities,” including gift store profits, as $50,493,000 and
related expenses of $47,507,000.106
However, for the average museum, the
100. I.R.C. § 513(a) (2006).
101. See AAM Releases Survey-Offers Financial Snapshot of Museum Field, supra note
41 (noting that eighty percent of museums that responded to the AAM survey operate a gift
store).
102. See Schneider, supra note 52 (noting that the Met generated $39 million in profits
in 2003 from sales of commodities, and that the Museum of Modern Art reaped $12.5
million in profits from gift store sales).
103. See MoMA Store, THE MUSEUM OF MODERN ART, http://www.momastore.org/muse
um/moma/StoreCatalogDisplay_-1_10001_10451_ (listing offsite stores in Japan and
Korea) (last visited Apr. 8, 2013); see also International Locations, THE METRO. MUSEUM
ART STORE, http://store.metmuseum.org/the-met-store-locations/international-
locations/scat/international/ (listing off-premises stores in Thailand, Australia, Japan, and
Mexico as well as eight stores in the United States) (last visited Apr. 8, 2013).
104. Kosaras, supra note 12, at 158.
105. Report of CFO, supra note 13.
106. Annual Report for the Fiscal Year Ended June 30, 2011, THE MUSEUM OF MODERN
ART (2011), http://www.moma.org/docs/about/AnnualBondDisclosureFY2011.pdf; see also
2010 ANNUAL REPORT, supra note 44 (reporting that Chicago’s Field Museum derived
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net profits from retail sales are relatively small. The Museum of Fine Arts
(MFA) in Boston, a wealthy museum subject to PILOTs, stated in its 2011
annual report that it spent $6,472,000 on merchandising operations and
earned $6,870,000 from such operations, earning a net profit of only
$398,000.107
Museum stores are unique retail sites in that they are intended to be
profitable while at the same time serving the greater mission of the
museum—education and enlightenment of visitors.108
These dual aims can
be met and museum shops are able to avoid paying UBIT by ensuring that
the products sold are related to their exhibits and collections.109
It is not the
case that the sale of such items is tax-exempt due to a loophole in UBIT.
The IRS has considered the sale of gift store items that are related to a
museum’s collection and has determined that they should not be subject to
UBIT because they further the charitable mission of the museum by
educating more people about the museum’s collections.110
Stores carry a
wide variety of goods, from prints of paintings and art history textbooks to
souvenir magnets, and so each item must be considered separately for
application of UBIT.111
For tax purposes, museums are incentivized to
ensure that the majority of products sold are substantially connected to
museum collections or purposes.112
fifteen percent of its sixty-eight million dollar operating budget from “business
enterprises”).
107. Museum of Fine Arts Annual Report, MUSEUM OF FINE ARTS (2011),
http://www.mfa.org/annual-report-2011/downloads/MFA-operatingResults2011.pdf.
108. Mottner & Ford, supra note 95, at 830.
109. Kosaras, supra note 12, at 134 (“[W]here the primary purpose behind the sale of
the item is ‘utilitarian, ornamental, a souvenir in nature, or only generally educational in
nature,’ the income generated from the sale of the item will be subject to UBIT.”).
Although museums may have to pay UBIT on some items, it is likely that the products are
sold due to their expected popularity and after tax, such goods still net a profit and provide
much needed revenue to the museum. Id. at 137 n. 118.
110. See Susan R. Bills, Keeping Ahead of UBIT Consequences of a Gift Shop, J. TAX’N
OF EXEMPT ORGS. 3 (2001) (referencing the IRS Revenue Ruling Rev. Rul. 73-105, 1973-1
CB 264 in which a gift shop sold reproductions of works in the museum’s collection, books
and souvenirs). As Bills notes, although the IRS concluded that sale of such items related to
the charitable purpose of the museum should be excluded from UBIT, the IRS found that
items with no relationship to the work in the museum or art generally were subject to UBIT;
these items included scientific books and city souvenirs. Id.
111. Id. (noting a process known as the “fragmentation rule,” where the IRS has issued
private letter rulings that analyze individual items in a gift store to determine whether they
further the charitable purposes or should be subject to UBIT).
112. Some museums have been creative in connecting goods to the museum’s exhibits.
See, e.g., Stephanie Murg, Pigments of Their Imagination, ARTNEWS, at 28 (Jan. 2012)
(announcing that the Guggenheim has launched its own interior paint brand, Classical
Colors by Guggenheim, which is based on color palettes in famous works showcased at the
museum).
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B. Dining Facilities
Restaurants are another feature that add not only to the museum
experience, but also to a museum’s revenue. At superstar museums
restaurants have evolved from little cafes serving sandwiches and drinks to
trendy eateries or fine dining establishments that are destinations
independent of the museums in which they are housed.113
These restaurants
may not be fully tax-exempt because many museums, especially superstar
museums, outsource restaurant operations to private for-profit companies
that pay taxes on income generated.114
Taxation on income from food establishments may depend on public
access to the dining facility.115
For example, if a restaurant is only
accessible through the museum, the restaurant is considered a convenience
to visitors that furthers charitable purposes and therefore is not subject to
UBIT.116
The IRS has reasoned that museum restaurants further the
charitable purposes of the museum by allowing visitors to optimize their
time at the museum, rather than having to leave the museum when
hungry.117
However, if a restaurant can be accessed via a separate entrance
and is thus open to the public at large without a museum admission fee or
during hours when the museum is not open to the public, then museum
revenue from the restaurant is taxable.118
Most of the trendy dining
facilities in superstar museums are open to the public, making them subject
to taxation. However, it is possible that small cafeteria-style shops may
escape UBIT and taxation.119
113. See, e.g., Larry Rohter, After the Putti, the Baby Calamari, N.Y. TIMES, Jan. 28,
2010, at C21 (noting that the days of museum basement cafeterias “are gone, or at least
numbered. Increasingly museums are moving away from the middle-school approach to
feeding visitors, . . . in favor of stylish restaurants that offer fine dining to go with the fine
art”).
114. See id. (illustrating that many of the famed restaurants found in museums are
operated by private companies or restauranteurs).
115. See Jeffrey Hurwit, Candlelight, A Glass of Wine, and UBIT: A Food and Facilities
Primer, HURWIT & ASSOCIATES 1 (2008) http://www.hurwitassociates.com/p_l_unrelated_c
andlelight.pdf (“[I]f a dining facility is accessible not only through the museum but also
through a door directly to the street, then it has been held by the IRS not to be primarily for
visitor convenience but for general public use, and therefore taxable.”).
116. Id.
117. Restaurant is not Unrelated Business, 72 J. TAX'N 121 (1990).
118. Id. But see Hurwit, supra note 115 (noting that the fragmentation rule applied to
gift shops is also used for restaurants, in that income can be separated based on whether the
money is generated by museum visitors or the outside public).
119. See Hurwit, supra note 115, at 1-2 (noting that a museum restaurant that was “larger
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C. Blockbuster Exhibits
Museums, especially superstar museums, attract attention from
“blockbuster exhibits.”120
Blockbuster exhibits are limited-time events
showcasing famous works, and tend to draw large audiences willing to pay
the extra charges.121
Blockbuster exhibits provide unique education and
programming and are normally a response to the community’s interests,
and their profits reflect that.122
Blockbuster exhibits, although often
profitable, do wholly further the charitable purpose of museums to educate,
and so revenue generated remains tax-free.123
While admission to blockbuster exhibits may be expensive, that price
tag seldom reflects net profit as money raised is often funneled back into
the museum.124
Without larger admissions fees and heavy advertising,
museums may not be financially capable of bringing such collections to
their communities since lending fees are often millions of dollars.125
than needed for visitors and staff” did not qualify under the convenience exclusion for a
variety of reasons, including its size, outside advertisements, and lack of admission fees).
120. See, e.g., Emily Bauman, To Blockbuster or Not to Blockbuster, F NEWSMAGAZINE,
Apr. 6, 2009, http://fnewsmagazine.com/2009/04/to-blockbuster-or-not-to-blockbuster/
(defining “blockbuster exhibits” as exhibits that “draw in huge crowds of out-of-towners
and, thereby, huge sums of money for both the museums that host them (which often charge
an additional fee for admission to the special exhibitions), the cities they are in, . . . the
galleries that surround them, the curators who produce them, collectors who own works by
artists in the shows, and more”); see also Kosaras, supra note 12, at 160 (“The attraction of
a blockbuster exhibition is not only the sheer number of people it can attract, but also the
opportunity to charge extra admissions for admittance to the exhibition, apart from
admittance to the museum’s general collections.”).
121. See E.H. Gombrich, The Museum: Past, Present and Future, 3 CRITICAL INQUIRY
449, 460 (1977) (noting that museums’ special exhibitions entice locals to visit the museum
to see something that is only available for a limited time). Compare Van Gogh Up Close,
PHILA. MUSEUM OF ART, http://www.philamuseum.org/exhibitions/743.html?page=2&ticke
t=1 (last visited Apr. 8, 2013) (listing the admission price of a recent Van Gogh exhibit at
the Philadelphia Museum as $25.00), with Plan Your Visit, PHILA. MUSEUM OF ART,
http://www.philamuseum.org/visit/12-270.html (lasted visited Apr. 8, 2013 (listing the
normal admission price to the Philadelphia Museum of Art for a two-day period as $20.00).
122. See Gombrich, supra note 121, at 460 (noting “tourism social pressure” that
encourages people to go to special exhibits).
123. Kosaras, supra note 12, at 160.
124. See Bauman, supra note 120 (implying that revenue from blockbuster exhibitions
may simply plug holes in a museum's existing budget: "[D]uring recessions, or when public
funding has been cut, or even during a renovation, the publicity and funds that a blockbuster
can bring to a museum can prove invaluable."). 125. See e.g., Tyler Green, Pay Per View, PORTFOLIO.COM, May 12, 2008, http://www.p
ortfolio.com/culture-lifestyle/culture-inc/arts/2008/05/12/Art-Museums-Charging-Big-Fees/
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Importantly, blockbuster exhibits offer a wider community benefit in that
they tend to draw tourists, thereby raising revenue for the municipality and
other local businesses.126
D. Lending
The other side of the transaction is the lending of portions of general
collections at high rates. In the past, museums would charge to cover the
expenses of transporting and caring for the pieces, but now there is profit
involved in lending.127
For example, in 2008 the Art Institute of Chicago
loaned the Kimbell Art Museum in Texas ninety-two Impressionist
paintings at a fee of two million dollars.128
As noted by the Met, loaning
pieces or collections is regarded as furthering the charitable purposes of a
museum, as loans educate and expose a larger populace to the pieces.129
Not only do museums raise revenue from lending out their collections, but
many superstar museums have procured deals to expand abroad, often in
return for a hefty donation from the local government.130
The Guggenheim,
(discussing a loan of ninety-two paintings for $2 million dollars).
126. See Urban Partners, Technical Memorandum: Economic Impact of the Salvador
Dali Exhibition (July 28, 2005), available at http://c0526532.cdn.cloudfiles.rackspaceclou
d.com/Economic_Impact_of_the_Salvador_Dali_Exhibition.pdf (studying the economic
impact of the Salvador Dali exhibit on the city of Philadelphia and noting that the exhibit
was viewed by over 370,000 people, caused about 52,000 trips to other Philadelphia tourist
spots, benefited at least 145 local business owners, created at least 830 full time jobs, and
produced tax revenue measured at $2.17 million for Philadelphia and $2.29 million for the
state of Pennsylvania).
127. See Kosaras, supra note 12, at 161 (“Until the 1990s, . . . most loans were
conducted ‘at cost.’ . . . Since the 1990s, several institutions have entered into loan
arrangements for the purpose of raising money for capital improvements.”); Bauman, supra
note 120 (noting that blockbuster exhibits may not only make money for the hosting
museum, but also raise “hefty sum[s]” for the lending museum).
128. Green, supra, note 125; see also Kosaras, supra note 12, at 162 (noting that the
Whitney Museum charged the San Jose Museum of Art $1.4 million for a loan and in the
1990s the Barnes Foundation charged about $7 million for part of its collection to tour Paris
and Tokyo, but pointing out that for the Barnes Foundation this was the alternative to selling
pieces from the collection to finance general museum operations).
129. See Collections Management Policy, THE METROPOLITAN MUSEUM OF ART, (Nov.
12, 2008), http://www.metmuseum.org/about-the-museum/collections-management-policy#l
oans (calling loans “an important means of fulfilling the educational and scholarly purposes
of the Museum’s charter”).
130. See, e.g., Sheppard Mullin, Would You Like Fries with that Picasso? The
International Franchising of World Class Museums, ART L. GALLERY BLOG (Jan. 29, 2009),
http://www.artlawgallery.com/2009/01/articles/museums-private-collectors/would-you-like-
fries-with-that-picasso-the-international-franchising-of-world-class-museums/ (discussing
international museum franchising and a recent $1.3 billion “cultural accord” between France
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once just a New York City fixture, can now be found in Venice, Bilbao,
Berlin, and Abu Dhabi.131
The increase in lending fees is partly due to the higher costs of
shipment and insurance, but some argue that lending museums are making
profits on the agreements.132
However, the director of the Art Institute of
Chicago suggests that high prices do not necessarily indicate that such
loans are offered to raise revenue.133
When considering the revenue gained
from the borrowing of collections, lending fees do not appear exorbitant or
solely revenue generating.134
Lending agreements and expansion provide
necessary funding, thereby suggesting a rationale for museums to take
advantage of traditional supply and demand economics.135
E. Renting Museum Property and Ticketed Events
Private and museum-sponsored functions are also a source of earned
income. Many museums, including the Met, charge large sums to rent out
their facilities.136
Others host ticketed after-hours events, such as the
American Museum of Natural History’s “A Night at the Museum,” a $129
and the United Arab Emirates to open a Louvre franchise in Abu Dhabi); Kosaras, supra
note 12, at 162–63 (noting that when the Bilbao branch of the Guggenheim opened in 1997
the Basque government signed a seventy-five year agreement to cover the construction of a
$100 million structure, the creation of a $50 million acquisition fund, the payment of a one-
time $20 million fee to the Guggenheim, and the subsidizing of the new museum’s annual
$12 million budget).
131. Annual Report 2010, THE GUGGENHEIM (2010), http://www.guggenheim.org/image
s/content/pdf/foundation/ar2010.pdf.
132. See Green, supra note 125 (noting that “industry watchdogs” argue that museums
should be able to cover the costs of lending but should not be able to profit as they appear to
be doing in recent lending agreements).
133. Id.
134. Id. (noting that the loan from the Art Institute of Chicago to the Kimbell Art
Museum in Fort Worth, which cost the Kimbell Art Museum $2 million, would generate the
Kimbell Art Museum more than $8 million).
135. See Alan Riding, A Gleaming New Guggenheim for Grimy Bilbao, N.Y. TIMES,
June 24, 1997, at C9 (explaining that the Spanish government paid for the construction of
the Guggenheim Bilbao Museum, created a $50 million dollar acquisitions fund for the
museum’s expansion, made a $20 million dollar payment to the Guggenheim, and agreed to
subsidize the Guggenheim’s $12 million dollar annual budget in return for the Guggenheim
lending part of its New York collection to Bilbao and running the museum’s operations).
Government support and private donations in the United States do not reach this level, and
with costs of museum operations so high, when another country is willing to foot the bill, it
may be reasonable for museums to take advantage of such hospitality.
136. See Entertaining at the Met, THE METROPOLITAN MUSEUM OF ART,
http://www.metmuseum.org/about-the-museum/entertaining-at-the-met (last visited Apr. 16,
2013) (providing information on the Met’s private entertainment venues).
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sleepover at the Natural History Museum.137
Renting of museum space is
considered a passive source of revenue for tax treatment, and is therefore
excluded from UBIT.138
Revenue produced has a close connection with
usual museum business and charitable goals; by renting out museum spaces
and opening the museum for special after-hours access, the museum is
increasing viewership of its collections and increasing its educational
reach.
There are also large fundraising events, like the previously discussed
Costume Institute Gala at the Met, which raise museums millions of dollars
in tax-exempt donations.139
Renting museum space provides opportunities
for a unique museum experience and meets the overarching goal of
educating and enlightening visitors, and money raised from such events
offset the costs of allowing such access.
F. Property Holdings
According to a 1997 study, 1,904, or forty-four percent, of museums
own real property.140
This number may seem low because many museums,
including some superstars, do not own the buildings in which they
operate.141
For many museums, like the Met or the Philadelphia Museum
of Art, the city owns the buildings that house their collections.142
However,
there are museums like the Guggenheim for which the city does not own
the museum’s building.143
This latter type of museum, attracts the most
137. AMNH Sleepovers, AM. MUSEUM OF NATURAL HISTORY, http://www.amnh.
org/plan-your-visit/amnh-sleepovers (last visited Apr. 8, 2013) (describing sleepover events
at the American Museum of Natural History).
138. I.R.C., IRM § 7.27.6, available at http://www.irs.gov/irm/part7/irm_07-027-
006.html (last visited Apr. 8, 2013); see Hurwit, supra note 115 (noting that if the museum
provides services in addition to renting out the space, such as catering, then such activities
are taxable).
139. I.R.C. § 501(c)(3).
140. KENYON & LANGLEY, supra note 7, at 17. The Lincoln Institute of Land Policy
report cites data on real estate ownership and notes that the average tax savings to museums
owning real estate is $133,682 per year.
141. See Pamela Skillings, The Metropolitan Museum of Art, New York City’s Famous
Met Museum, ABOUT.COM, http://manhattan.about.com/od/artsandculture/a/metmuseum
nyc.htm (last visited Apr. 8, 2013) (noting that New York City owns the Met’s main
buildings and also provides much of the building’s utilities); Administration, PHILA.
MUSEUM OF ART, http://www.philamuseum.org/information/43-323.html (last visited Apr.
8, 2013) (noting that Philadelphia owns the building in which the Philadelphia Museum of
Art is situated).
142. Skillings, supra note 141.
143. Guggenheim New York, USA: Architecture Information, E-ARCHITECT,
http://www.e-architect.co.uk/new_york/guggenheim_new_york.htm (last visited Apr. 8,
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attention from states and municipalities because of the revenue lost due to
the property tax exemption for museum real estate. These may be at
particular risk for state challenges and PILOTs.
IV. THE COMMERCIALITY DOCTRINE
The commerciality test has been considered as a way to limit profit-
seeking nonprofits.144
The commerciality doctrine is a non-statutory tool
that brings income earned by certain commercial activities into the realm of
taxation and can operate as a way to successfully challenge a nonprofit's
tax-exempt status.145
It focuses on profits when considering tax exemption,
and measures whether there is a “commercial hue” in the nonprofit’s
activities, and whether such “activities are largely animated by [a]
commercial purpose.”146
The test analyzes the “manner in which an
exempt organization undertakes an activity,” rather than the purpose for
which the nonprofit commences the activity, which UBIT considers.147
The commerciality doctrine originated in a 1924 Supreme Court
decision on a challenge to the commercial activity of a nonprofit religious
group that owned real estate and stocks and had retail activity.148
It was
expanded in 1945 by the Supreme Court and applied in a line of 1960’s
cases to deny tax exemption to nonprofits that were publishing and selling
materials for profit.149
There are two tests under the commerciality
doctrine—the counterpart test and the aggregation test.150
The counterpart
test considers whether the nonprofit is directly competing with for-profit
2013) (stating that the Solomon R. Guggenheim Foundation owns and operates the
Guggenheim Museum on Fifth Avenue).
144. John D. Colombo, Commercial Activity and Charitable Tax Exemption, 44 WM. &
MARY L. REV. 487, 495 (2002); Kosaras, supra note 12, at 140.
145. Kosaras, supra note 12, at 137–40.
146. Id. at 139 (quoting Better Bus. Bureau of Wash., D.C., Inc. v. United States, 326
U.S. 279, 283 (1945)); see also Colombo, supra note 144, at 503–04 (noting that the
consideration of a nonprofits activities having a commercial hue has not been systematically
applied by the IRS or courts and citing as examples the Third Circuit, which stated that a
charity should be able to turn a profit in order to further its charitable goals and the IRS’s
approval for tax exemption of hospitals and universities opening health clubs with for-profit
type fees, noting though that income from such activities is subject to UBIT).
147. Kosaras, supra note 12, at 138.
148. Colombo, supra note 144, at 497–98 (noting that this organization’s tax exemption
was not revoked because the court found that the commercial enterprises were a small
portion of overall activities, but that the case is the first to have considered a nonprofit’s
commerciality).
149. Kosaras, supra note 12, at 138–39.
150. Id. at 138–39.
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firms in its activities, and the aggregation test notes the difference between
nonprofits that conduct profitable activities as part of their larger operations
and those that do so as their main purpose.151
IRS regulations suggest that if the commercial activity is insubstantial
compared to overall charitable activity that is acceptable, and that tax-
exempt status is affected only if the commercial activity is “substantial,”
with the exception that if the activities are “in furtherance of an exempt
purpose,” they are excusable from taxation.152
However, the issue is
confused by the fact that the IRS sometimes applies the stricter
commerciality doctrine’s limit on commercial activity, which does not
usually consider the charitable purposes for the commercial activity, and
that neither courts nor the IRS have created a clear rule in addressing
commercial activity of nonprofits.153
Unless its scope is expanded, the commerciality doctrine is unlikely to
be applied to museum shops or profitable ventures, since such commercial
activities, despite garnering attention as museums increase their focus on
these enterprises as sources of revenue, are never the main purpose of
museums.154
Such activities do adhere to the Code’s allowing nonprofits to
earn revenue through commercial activity as long as the primary purpose of
the organization is a charitable mission under section 501(c)(3).155
Under
the commerciality doctrine, museums accused of excessive commercial
activity and competing with for-profits may fail the counterpart test, but
will most likely pass the aggregation test because commercial activities
further their main charitable purpose and do not exist as a separate goal or
function on their own.156
Therefore, while museums should pay attention
to the method in which they conduct their profitable activities and should
151. Id. at 138–39.
152. Colombo, supra note 144, at 504.
153. Id. at 501–03.
154. See Kosaras, supra note 12, at 140 (suggesting that although museums may fail the
counterpart test, the aggregation rule offers protection from the commerciality doctrine.
Kosaras cautions that this view is narrow and that museums could fall within the
commerciality doctrine if museum are considered to provide entertainment, in which case
almost the entire operation of the museum may fail the counterpart test and would suggest
museum purposes to be entertainment for the aggregation test). While this is one argument
to suggest the commerciality doctrine can be expanded, it requires a very broad reading of
the commerciality doctrine and is therefore unlikely to be applied based on the precedent.
155. David A. Brennan, The Commerciality Doctrine as Applied to the Charitable Tax
Exemption for Homes for the Aged: State and Local Perspectives, 76 FORDHAM L. REV. 833,
847 (2007) (noting that under the commerciality doctrine “it is not necessary that an
institution seeking tax-exempt charitable status be ‘exclusively’ charitable, only that it be
‘primarily’ so”). 156. But see Kosaras, supra note 12, at 140 (suggesting that this is an overly narrow
take).
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be aware of the commerciality doctrine, the likelihood that they will be
affected, based on the way it is currently applied, is remote.
V. STATE AND LOCAL TAX EXEMPTION
State governments tend to apply similar tax principles to charitable
organizations as those imposed by the federal government.157
State law
regarding nonprofits is not uniform, but generally allows for property tax
exemption, as well as income tax exemption for museums.158
On average,
states lose about five percent of property tax revenue from tax-exempt
nonprofits.159
Since museums, especially superstar museums, tend to sit in
large metropolises with high concentrations of nonprofits, the lost source of
revenue from exempt organizations in these cities can be drastic.160
At the state level, tax exemption is not as settled as it is federally.
Seventeen states mandate charitable exemption in their constitutions, while
twenty-five states provide for charitable exemption constitutionally but do
not require it, thereby leaving the specifics within the control of the
legislature and courts.161
Most states base tax exemption on charitable
purposes similar to those required of section 501(c)(3) organizations at the
federal level, and so museums are often exempt from state tax due to their
educational missions.162
To meet the requirements of property tax
exemption, twenty-seven states require that an organization qualify under
section 501(c)(3).163
Many states then apply a narrower test to section
501(c)(3) organizations to establish that tax exemption is warranted.164
Often a two-part test is used to exempt a nonprofit from property tax—first,
that the organization be a nonprofit that does not benefit any shareholders,
157. Id. at 117.
158. Id. at 141; see also KENYON & LANGLEY, supra note 7, at 10 (noting that state
property tax exemption for nonprofits is based on precedential case law that dates back to
British common law, but that annual property tax exemption only became the accepted
standard in the 1830s).
159. KENYON & LANGLEY, supra note 7, at 18.
160. See id. at 18, 23 (noting that a high density of nonprofits reduces tax revenue in big
cities, considering that major revenue-producing hospitals and educational institutions,
along with other nonprofits, including museums, may cause a city to forego a massive
amount of tax dollars and suggesting that Boston loses over $340 million merely from
universities and hospitals exemptions).
161. See id. at 11 (citing Louisiana and New York as states that mandate charitable
exemption in their constitutions; and Florida, Texas, Massachusetts, California, and
Pennsylvania as states that constitutionally provide for tax exemption but do not mandate it).
162. Kosaras, supra note 12, at 142.
163. KENYON & LANGLEY, supra note 7, at 11.
164. KENYON & LANGLEY, supra note 7, at 11.
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and second, that “its assets must be irrevocably committed to serving
charitable purposes.”165
Seventeen states leave the determination of
qualification for property tax exemption to local municipalities.166
Generally, the courts play a much larger role at the state level in
interpreting tax exemption requirements.167
Kosaras notes that “the
statutory language for property tax exemption is sufficiently ambiguous
concerning arts organizations that the courts have broad discretion in
characterizing arts organizations as engaging in educational activities or
merely providers of entertainment . . . ”168
Collectively, this means that a
museum can be tax-exempt under section 501(c)(3), but not under state tax
laws.169
At the state level, there are two major justifications for property tax
exemption, according to the Lincoln Institute of Land Policy: (1) because
nonprofits provide community benefits and their property is operated for
the public, such property should not be taxed; and (2) since nonprofits
benefit the public and relieve the government from the responsibility to
165. Developments in the Law, supra note 64, at 1619.
166. KENYON & LANGLEY, supra note 7, at 11; Developments in the Law, supra note 64,
at 1620 (noting that state property tax exemption is interesting in that exemption is often
granted at the state level, but the consequences of tax exemption (lost revenue) are felt more
by local governments than by the state).
167. KENYON & LANGLEY, supra note 7, at 12; see Evelyn Brody, All Charities are
Property-Tax Exempt, But Some Charities are More Exempt Than Others, 44 NEW ENG. L.
REV. 621, 626 (2010) (noting that when state constitutions use limiting terms such as
“institutions of purely public charity” in order to restrict tax exemption, courts are given
more discretion in establishing the requirements for nonprofits to obtain tax exemption;
Brody argues that this contributes to the lack of uniform state tax treatment of nonprofits);
see e.g. Brody, supra note 167, at 627 (citing Hosp. Utilization Project v. Pennsylvania, 487
A.2d 1306 (Pa. 1985), as creating limits for exemption by establishing a five-part test that a
nonprofit must meet in order to be tax-exempt); Kelly Kleiman, Illinois and the Amazing
Disappearing Property Tax Exemption, SAMEFACTS.COM, Aug. 26, 2011, http://www.sa
mefacts.com/2011/08/health-care/illinois-and-the-amazing-disappearing-property-tax-
exemption/ (examining an Illinois Supreme Court ruling that stated that there are only three
types of exempt organizations—religious institutions, schools, and charities—which led to
three hospitals losing their tax-exempt status and has spurred challenges of other
nonprofits).
168. Kosaras, supra note 12, at 143. Kosaras points to the strict application and
understanding of “educational purpose” to pertain to only “the expansion of knowledge, by
teaching, instruction or schooling” in New York in the 1970s, which excluded museums
from tax exemption. Id. at 143 (quoting Swedenborg Found., Inc. v. Lewisohn, 351 N.E.2d
702, 706 (N.Y. 1976)).
169. KENYON & LANGLEY, supra note 7, at 11; see e.g. Cohen, supra note 14 (discussing
Ohio’s challenge to the state tax exemption of the Packard Museum, which is tax-exempt
under section 501(c)(3)); Kleiman, supra note 167 (illustrating that the Illinois Supreme
Court’s ruling may block organizations’ property tax exemption even if they are classified
as nonprofits under section 501(c)(3)).
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provide services, that justifies a subsidy in the form of property tax
exemption.170
This latter rationale is very similar to the subsidy theory of
federal income tax exemption for nonprofits.171
However, states rely on
more than considerations of public support, and many take into account
public access and general community benefit provided by the
organization.172
In application, Professor Evelyn Brody notes that states
tend to place more importance on a quid pro quo justification for tax
exemption as opposed to the federal rationale of subsidizing nonprofits
because of their charitable nature.173
Since states are not uniform in their treatment of tax-exempt
organizations, similarly structured museums can be taxed differently based
on location; thus, museums have to be versed in different state
requirements and restrictions.174
Notably, some states do not allow exempt
organizations to make a profit, even if such profits are used for charitable
purposes.175
This has a direct effect on superstar museums.
As more attention is paid to the commercial endeavors of nonprofits,
some states have questioned whether all nonprofits deserve the same level
of tax exemption.176
Minnesota and Oregon, for example, are two states
that have examined the amount of public support nonprofits are providing
for free or at a discount to determine whether they deserve the subsidy of
170. KENYON & LANGLEY, supra note 7, at 10 (pointing out that the second rationale is
also termed the “quid pro quo theory” and that it has grown in popularity as states have used
stricter classifications of charitable organizations for the purpose of property tax exemption
and have relied on the quid pro quo theory to determine eligibility for property tax
exemption).
171. Kosaras, supra note 12, at 144.
172. Id.; see also id. at 144, n. 160 (citing Commonwealth v. Barnes Found., 159 A.2d
500, 506 (Pa. 1960) as illustrating the city of Philadelphia pushing for the Barnes
Foundation to not qualify as a public charity for property tax exemption due to limited
access for the public and the court stating that even a public library restricts access to the
public and that is not enough to determine that the art gallery was not a public charity); see
also KENYON & LANGLEY, supra note 7, at 12 (“[R]elief of a government burden is not
normally interpreted narrowly to mean services that government actually provides, but
rather, services that government views as beneficial.”).
173. Brody, supra, note 167, at 622 (noting also that there are four basic considerations
for state tax exemption: charitable purposes, court and constitution based tests, donations
and government assistance, and the role of commercial activities).
174. See KENYON & LANGLEY, supra note 7, at 12 (noting that states vary in whether
they allow tax-exempt organizations to charge admissions or fees, or make a profit even if to
further the organization’s charitable mission).
175. See id.
176. See Stephanie Strom, Tax Exemptions of Charities Face New Challenges, N.Y.
TIMES, May 26, 2008, at A1 (citing Evelyn Brody as stating that there has been an increase
in state challenges to property tax exemptions of nonprofits based on their merit for such
subsidies).
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property tax exemption.177
This suggests that states are indeed moving
toward a model in which tax exemption is based on a nonprofit’s ability to
measure and prove its economic benefit.178
Quantifying how much is given
to the public may be difficult for museums, due to the myriad of services
museums provide directly and indirectly at subsidized or no cost.179
Other
states have considered changing tax laws, such as Louisiana, where the
Mayor of New Orleans was pushing for constitutional amendments
allowing the city to tax exempt property.180
However, the Mayor decided
not to pursue such amendments after the release of the New Orleans
Nonprofit Property Tax Exemption Survey by the Louisiana Association of
Nonprofit Organizations, which illustrated the need for property tax
exemption and the harms of revoking the subsidy, citing the important role
nonprofits play, the reasons that they should be tax-exempt, and the effect
of reduced donations on nonprofits.181
The state of Montana considered
imposing a requirement that a nonprofit’s property tax exemption be
reviewed yearly by the Department of Revenue, but dropped the idea due to
impracticability and cost.182
Despite efforts to reform state tax exemption
of nonprofits, nonprofits have successfully convinced many politicians of
the necessity of such benefits, thereby staving off far-reaching changes to
state tax law.183
The frequency with which such issues are being raised,
however, illustrates the shift in public perception toward the role
nonprofits, including museums, play in their communities.
Many museums hold large property interests in the center of
commercial hubs making property tax exemption a huge relief.184
A 1997
study showed that museums on average saved sixteen percent a year from
the property tax exemption.185
For museums, regardless of size, the savings
177. Id. 178. Brody, supra note 167, at 622
179. See Maxwell L. Anderson, METRICS OF SUCCESS IN ART MUSEUMS, THE GETTY
LEADERSHIP INSTITUTE (2004), available at http://www.cgu.edu/pdffiles/gli/metrics.pdf
(noting that museums present a unique problem in that it is hard to quantify the success and
benefits of operations and suggesting ways in which museums can measure the fulfillment
of their purposes such as education).
180. National Counsel of Nonprofits, Taxes, Fees, and PILOTs (Payment in Lieu of
Taxes) (2012), http://www.councilofnonprofits.org/public-policy/state-policy-issues/govern
ment-taxes-fees-and-pilots.
181. Id.
182. Id.
183. See Brody, supra note 167, at 623 (stating that nonprofits have largely been able to
fend off challenges to their tax exemption and suggestions for state legal reform).
184. See KENYON & LANGLEY, supra note 7, at 17–18 (showing the savings of different
types of nonprofits from property tax exemption and noting that nonprofits are often in
cities).
185. Id. (noting that this includes museums with a full range of incomes and that the
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of property tax dollars is vital for programming. Arguments against the
property tax exemption suggest that rather than subsidizing those
organizations that most benefit the community, the property tax exemption
offers the largest subsidies to those organizations with the most expensive
real estate, and the city is forced to bear the costs while the benefits are
more widely spread.186
While this may be partly true for superstar
museums, it ignores the direct benefits on local municipalities created by
these museums. For example, the total economic impact on the city of
Philadelphia and surrounding areas from the Salvador Dali exhibit at the
Philadelphia Museum of Art was measured at a surplus of $54.9 million.187
In turn, this additional revenue generated $2.17 million in revenue for the
city in the form of taxes.188
States often require that property be owned and operated for charitable
purposes in order to qualify for tax exemption.189
This can cause issues for
museums operating profitable activities, such as parking lots.190
States are
split on their treatment of property not utilized solely for exempt or non-
exempt purposes.191
In some states, an organization may fully lose its tax-
exempt status for commercial operations conducted on premises.192
In
median savings is four percent). Nonprofits earning over ten million dollars receive two-
thirds of overall savings from property tax exemptions despite such organizations
representing around four percent of nonprofits with property. Id. at 18. Superstar museums
fall within this category of nonprofits generating over ten million dollars in income.
186. Id. at 18; see also id. at 11 (noting that local city governments bear the cost of
nonprofits in their cities, but most nonprofits are appreciated and accessed by people from
outside the city).
187. Urban Partners, supra note 126, at 103 (measuring the impact as $30.7 million
directly and $24.2 million indirectly).
188. Id. at 103.
189. See Kosaras, supra note 12, at 145 (observing that there are three main categories
of property exemption applied at the state level: “(1) statutes requiring that property must
be used exclusively for the organization’s charitable purposes; (2) statutes requiring the
primary or dominant use of the property for the organization’s charitable purposes; and (3)
statues that allow partial use of the property for other than charitable purposes.”); see also
KENYON & LANGLEY, supra note 7, at 13 (noting that many federally exempt organizations
do pay property taxes because the property they own that is not used for charitable purposes,
is being held for later development or is being rented).
190. Compare KENYON & LANGLEY, supra note 7, at 13 (discussing how parking lots
have become a source of litigation because their operation amounts to a commercial use of
property without clear furtherance of an exempt purpose), with Bowers v. Akron City Hosp.,
243 N.E.2d 95, 97 (Ohio 1968) (stating that the profits from a parking lot associated with a
school, hospital or museum do not preclude the parking lot from property tax exemption as
long as the profits were used toward the expense of providing such a convenience to visitors
and noting that what is important is the use of the property in question and not the fact that
profits are made from the property).
191. KENYON & LANGLEY, supra note 7, at 13.
192. Id.; see also Joanne Huist Smith, Packard Museum Fights for Tax Exemption,
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other states, property tax is calculated based on the fraction of the building
employed for non-exempt functions.193
Museums, especially superstar
museums with sizeable or increasing commercial endeavors, may be
affected by this issue.
Since state tax exemption as it relates to museums is often unstable
and poorly defined, museums have reason to worry that fiscally struggling
states in search of sources of revenue may review and challenge the tax
exemption of profitable museums. The Packard Museum in Ohio has been
so questioned.194
The Packard Museum, a federally tax-exempt museum,
has been challenged on its state tax exemption due to its profitable
activities—specifically “income it earns from admission fees, the rental of
the museum for private events, museum store sales, and the rental of
vintage cars.”195
Ohio’s concern relates back to its requirement that tax-
exempt property be used for a proper charitable goal, and that tax-exempt
property “not be used with a view to profit and cannot be in competition
with other commercial enterprises.”196
Ohio’s challenge of the tax status of
the Packard Museum may imply that the state is more concerned with the
economics of tax exemption rather than the rationales behind exemption,
such as the provision of a benefit to the community, relieving the
government of a burden, or the financial costs of operating a museum.
Realizing that state tax exemption is not as clear as federal tax
exemption, and may often have stricter qualification requirements,
museums need to be wary of state policies toward nonprofits.197
To avoid
DAYTON DAILY NEWS, http://www.daytondailynews.com/news/news/local/packard-
museum-fights-for-tax-exemption-1/nPR8S/ (last updated June 10, 2012, 3:17 PM) (noting
that the state of Ohio wants to revoke the Packard Museum’s tax-exempt status due to the
museum charging admissions, renting property for private uses, renting vintage cars,
operating a gift store and holding a yearly sale of car-parts).
193. KENYON & LANGLEY, supra note 7, at 13; see, e.g., Property Tax Exemptions in
Alaska, STATE OF ALASKA (2003), available at http://www.commerce.state.ak.us/
dca/logon/tax/tax-exemptions.htm (stating that if a portion of exempt property is used for a
non-exempt purpose that part of the property that is used for the non-exempt purpose will be
taxed).
194. See Cohen, supra note 14 (pointing to the implementation of PILOTs and state
challenges to tax exemption as raising concerns for nonprofits, and specifically citing the
current issues with the Packard Museum in Ohio).
195. Id. The author notes that there is a second issue at play with the Packard Museum
in that the President and CEO of the museum was also the property owner when the
museum first applied for tax exemption and the museum reports revenue in the millions of
dollars but has low operating costs which are considered to be under $300,000, but that this
issue should be considered distinct from non-profit tax exemption concerns.
196. Smith, supra note 192 (quoting Richard A. Levin, former tax commissioner, in the
most recent rejection of tax-exempt status for the Packard Museum).
197. But see Brody, supra note 167, at 623 (noting that nonprofits have been able to
rally together to lobby against challenges at local levels to tax exemption).
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unnecessary scrutiny, museums must ensure compliance with state-specific
laws and clearly communicate the economic and social benefits they
provide to their state communities. Additionally, since profitable activities
may lead states to question a museum’s charitable status, even if the
museum is federally tax-exempt, museums would be prudent not to
generate revenues vastly larger than their operating costs, investment in
collections, and public services.198
VI. PAYMENT IN LIEU OF TAXES199
Many superstar museums, because of their property holdings and
appearance of great wealth, are potentially affected by the growth of
PILOTs. The recent development of PILOT programs has been attributed
to a push to limit tax exemption and to expand revenue streams to the state
or local government.200
There is also a correlation between the growth of
PILOTs and the increase in skepticism toward many nonprofits.201
The
expansion of the Boston PILOT program, currently the largest PILOT
program, may foreshadow future changes in the nonprofit world, and may
set a significant precedent for pressure on superstar museums to contribute
198. See, e.g., COMMUNITY LEGAL RESOURCES, PROPERTY TAX EXEMPTION FOR
AFFORDABLE HOUSING, LEGAL LINES: LEGAL ISSUES FOR NONPROFITS 3 (2005), http://www.c
lronline.org/resources/legal-lines/property/propertytax.pdf (noting that the Michigan Court
of Appeals reversed the Michigan Tax Tribunal’s rejection of tax exemption for the
Kalamazoo Aviation History Museum with attention to the education the museum provides
the public, concentrating on the fact that admission fees were low and revenue did not meet
operating costs, and noting that admission fees were subsidized).
199. PILOTs are defined in the Lincoln Institute of Land Policy Report as “payments
‘made voluntarily by tax-exempt nonprofits as a substitute for property taxes.’” KENYON &
LANGLEY, supra note 7, at 4. There are at least four distinct types of PILOT programs.
First, PILOTs from a larger government body (like the federal government) to a smaller
government body (like a state) to reimburse for exempt property. An example of this might
be a federal courthouse on city land. Second, PILOTs from a state to a city for a tax-exempt
state-run program. This might be a state university. Third, government programs such as
publicly owned utilities, housing authorities or airport commissions contribute PILOTs to
municipalities from their profits. Finally, nonprofits that remain tax-exempt can make
PILOTs to local municipalities for community services the nonprofit otherwise uses free of
cost. The focus of this discussion is on the fourth category—PILOTs made by nonprofits to
municipalities to contribute toward the cost of city provided services. Edward A. Zelinsky,
The Once and Future Property Tax: A Dialogue with my Younger Self, 23 CARDOZO L. REV.
2199, 2215 (2002).
200. See KENYON & LANGLEY, supra note 7, at 7 (“Two major factors drive the high
level of interest in PILOTs around the country: growing scrutiny of the nonprofit sector;
and increasing pressure on municipalities to find new sources of revenue.”).
201. Id.
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tax-like payments at the local level.202
Cambridge, Massachusetts is the first known local government to
apply PILOTs, dating the program back to 1929 when Harvard University
started paying PILOTs to the city.203
The use of PILOTs has increased
steadily since then and various versions have been applied in at least 117
municipalities in 18 different states.204
Boston currently runs the largest
PILOT program in the country and generates the most revenue.205
While PILOT programs have existed for decades, they are receiving
increased attention as cities are turning to nonprofits as fresh sources of
revenue to meet increasing city budgets.206
In a 1996 study of state and
local tax treatment of charities, Janne Gallagher suggests that the following
common municipal issues encourage cities to seek PILOTs:
Cities that are in poor financial condition because industrial
and residential flight reduced their tax base, while the
population that remains is increasingly in need of expensive
services.
A high degree of fragmentation among local governments, with a consequent narrowing of any particular jurisdiction’s tax base.
Heavy reliance on the property tax to finance schools and local services.
Voter resistance to tax increases, even when growth demands more spending, as with the growing number of school-age children.
The virtual disappearance of federal aid to cities. Cuts in state aid to local governments.
207
Gallagher also notes cities that have “downtown benefit districts,” in which
extra city services such as security or street cleaning are provided, often
impose PILOTs on nonprofits.208
The Lincoln Institute of Land Policy report suggests that PILOTs
202. See National Counsel of Nonprofits, supra note 180 (noting that several cities are
considering PILOTs, have requested certain nonprofits pay PILOTs, or are increasing
requested PILOT payments. Examples include Hartford, Connecticut; Jamaica Plain,
Massachusetts; and Providence, Rhode Island.).
203. Gallagher, supra note 9, at 85.
204. KENYON & LANGLEY, supra note 7, at 2.
205. Id.
206. Id. at 3.
207. Gallagher, supra note 9, at 73.
208. Id. at 88 (listing cities with such downtown business districts, including
Wilmington, Delaware, and Baltimore, Maryland).
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target faults in tax exemption policy.209
PILOT programs account for the
skewed application of the property tax exemption, which is to the
advantage of nonprofits with expensive landholdings rather than those
offering the most public benefit.210
PILOTs also collect contributions that
cover a nonprofit’s share of municipal services in order to reduce the costs
that the local community is forced to bear while a much larger population
uses the nonprofit’s services.211
This is often true with superstar museums,
which serve a broader community and thus allow out-of-town visitors
access and benefits without their sharing in the cost of subsidizing city
services. Museums are generally exempt from property taxes due to the
benefits and services they provide the state or city thereby releasing the
government of certain responsibilities.212
However, in cities where
nonprofits, such as superstar museums, have vast land wealth, local
governments may push for PILOTs because they view certain nonprofits as
taking more from the community in terms of local services than they
provide the locality. 213
PILOT agreements tend to be negotiated when land is acquired by a
nonprofit or tax exemption is requested.214
PILOTs may range from the
more formal and uniform programs, such as the program currently
implemented by Boston, to case-by-case arrangements, as in most other
cities.215
Calculations and suggested payment amounts tend to vary widely,
making them difficult to predict and uneven in application.216
Some
scholars consider PILOTs a “middle-ground” because the programs allow
nonprofits to remain property tax-exempt, while creating agreements
whereby cities receive some of the funds they require to provide municipal
services to nonprofits.217
209. KENYON & LANGLEY, supra note 7, at 2.
210. Id.
211. Id. (“[N]onprofits impose a cost on municipalities by consuming public services,
such as police protection and roads.”).
212. Kosaras, supra note 12, at 142.
213. Marsha S. Shaines, Legal Issues in Museum Administration, Tax Update, ST024
ALI-ABA 213, 219 (2012).
214. KENYON & LANGLEY, supra note 7, at 22 (noting that PILOT negotiations are more
likely to occur when expansion of a nonprofit includes previously-taxed land).
215. Id. at 6.
216. Id. at 39 (referencing different types of calculations: Some are based on a
percentage of what the property tax would be, some are calculated using a measure of the
size of the property, some are figured based on economic services provided by the nonprofit,
and others are just ad hoc with no clear logic).
217. Id. at 9. The Lincoln Institute of Land Policy also notes that there are alternatives
to PILOTs that can address the mismatch between funding and benefiting from nonprofit
services, such as state governments providing grants to local governments that have a lot of
their property held by tax-exempt nonprofits. Id. at 26.
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PILOTs are not legally mandated payments.218
They are technically
voluntary gentleman’s agreements, making the negotiations between cities
and individual nonprofits important to the successful implementation of
PILOT programs.219
Cities implementing PILOTs appear to honor and
promote the rationales for museum tax exemption—relief of the
government burden of educating the public and the provision of community
benefits—by insisting that PILOTs are completely distinct from a
museum’s tax-exempt status.220
By exempting nonprofits from property
taxes, states and cities are accepting that nonprofits do not have to
contribute toward city services that are largely supported by property tax
revenue.221
It appears, however, that cities supporting many large
nonprofits use PILOTs to reduce the economic assistance they provide to
nonprofits, essentially circumventing nonprofit tax exemption.
The fact that PILOTs are not enforceable by law distinguishes them
from compulsory taxes.222
PILOTs are considered “nominally voluntary
outlays by the exempt institution, [but] the political reality is usually more
complex as the municipality brandishes any number of potential sanctions
to induce the PILOT payment.”223
Some cities go so far as to threaten to
revoke nonprofit status for those refusing to negotiate PILOTs.224
Even if a
city does not obviously threaten a nonprofit when requesting a PILOT,
refusing PILOTs after a city’s request can create negative consequences
and sour the relationship between the nonprofit and the city.225
Due to the
218. Id. at 6.
219. Id. at 6.
220. See Gallagher, supra note 9, at 90 (advising cities planning on instituting PILOTs
that they should avoid any language related to tax exemption).
221. See Laurence S. Seidman, PUBLIC FINANCE 252 (2008) (stating that as of 2006, on
average twenty-one percent of state and local revenue is raised by property tax, and that the
majority of local governments rely on property taxes for more than half their tax revenue).
222. KENYON & LANGLEY, supra note 7, at 43.
223. Zelinsky, supra note 199, at 2215–16 (“These sanctions range from the
municipality marshaling public opinion against the exempt entity if it declines to make
PILOT payments to the denial of zoning relief or building permits desired by the tax-exempt
entity to, in the extreme case, the municipality’s threat to seek political or judicial
revocation of the entity’s tax exempt status.”).
224. Developments in the Law, supra note 64, at 1625 (noting that revocation of tax
exemption by cities has usually been upheld for hospitals, as well as fitness centers run by
the YMCA). In the past, cities have revoked tax exemption, but courts usually overturn
such city action; however, in unique circumstances where a clear lack of charitable purpose
exists, courts have affirmed city revocation of property tax exemption. See id. Cf. KENYON
& LANGLEY, supra note 7, at 24 (citing The MacDowell Colony in Peterborough, New
Hampshire as an example of a city attempting to revoke tax exemption but being overturned
by the state on the grounds that the organization provided community benefits worthy of tax
exemption).
225. Shaines, supra note 213, at 219 (suggesting that nonprofits feel pressure to
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power of city agencies over zoning, building permits, and local services,
municipalities can create obstacles for nonprofits that refuse to negotiate
favorable PILOTs.226
For this reason, PILOTs tend not to be entirely
voluntary, and under some definitions may come very close to the nature of
a tax.227
The amount of revenue PILOTs create for most cities is minimal.228
Theoretically, both the city and its nonprofits further community welfare,
which suggests that PILOTs merely reallocate resources from certain types
of community benefits to others.229
This raises the question of whether
such programs are ideal, considering the benefits nonprofits, like museums,
provide for cities, and whether in the future cities are likely to approach
museums for PILOTs.
A. PILOTs in Boston
Boston operates the most formal and highest revenue-producing
PILOT program in the country.230
In 2009, Boston’s Mayor Menino
initiated a PILOT Task Force to analyze the program and suggest
contribute); see, e.g., KENYON & LANGLEY, supra note 7, at 24 (discussing a case in which
the MacDowell Colony was asked to pay a PILOT to account for issues with the Colony’s
tax exempt-status, and which the MacDowell Colony refused to pay, thus resulting in the
town denying the organization its previous tax-exempt status).
226. KENYON & LANGLEY, supra note 7, at 6; see also Zelinsky, supra note 199, at 2216
(“In practice, it is typically in everyone’s interest to compromise on a ‘voluntary’ PILOT
payment which is often less than the full taxes that would be paid on loss of exempt status,
but which, from the municipality’s perspective, provides immediate financial succor.”).
227. See BLACK’S LAW DICTIONARY 1496 (Bryan A. Garner, 8th ed. 1999) (“‘Taxes are
the enforced proportional contributions from persons and property, levied by the state by
virtue of its sovereignty for the support of government and for all public
needs.’ This definition of taxes, often referred to as ‘Cooley’s definition,’ has been quoted
and indorsed, or approved, expressly or otherwise, by many different courts. While this
definition of taxes characterizes them as ‘contributions,’ other definitions refer to them as
‘imposts,’ ‘duty or impost,’ ‘charges,’ ‘burdens,’ or ‘exactions’; but these variations in
phraseology are of no practical importance.” (quoting 1 THOMAS M. COOLEY, THE LAW OF
TAXATION 61–63 (Clark A. Nichols ed., 4th ed. 1924))).
228. See KENYON & LANGLEY, supra note 7, at 33 (noting that revenue from PILOTs
represent a miniscule portion of city budgets and that based on a 1990’s study PILOT
revenue constituted only .15% of Baltimore’s budget, .54% of Philadelphia’s and 1.37% of
Boston’s).
229. See NSFRE, supra note 82, at 1 (“The theory behind income tax exemption for
section 501(c)(3) organizations is that they are providing needed community services
(‘public good’), and to extract payments for taxes from these organizations would decrease
the amount of service or ‘public good’ these organizations could provide.”).
230. KENYON & LANGLEY, supra note 7, at 21 (citing statistics that in 2009 Boston
received $15.7 million in PILOTs).
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changes.231
In 2010, the Task Force provided suggestions, which included
making the program more consistent by equalizing PILOTs through a
uniform method for calculating contributions and broadening the range of
nonprofits contributing by including nonprofits previously not asked to
participate.232
Boston has subsequently increased its suggested payment
amounts and has widened its scope, partly by including museums that
previously did not contribute (original payments were largely from
educational and medical institutions).233
The Task Force suggestions led Mayor Menino to amend the city’s
PILOT program.234
Boston now requests contributions of nonprofits with
property holdings over $15 million, and calculates the payment as twenty-
five percent of what the property tax would be.235
By exempting $15
million of property value, the program focuses on larger nonprofits.236
Discount credits of up to fifty percent were recommended, but they
correlate with the level of benefit the organization is perceived to directly
provide city residents.237
Mayor Menino has defended the program’s
inclusion of museums and maintains that the program is not equivalent to a
tax and rather is a request to “increase the ‘voluntary’ contributions cultural
institutions make through” PILOTs.238
However, the fact that the payments
are considered ‘in lieu of taxes,’ have a formalized and defined method of
assessment, and are calculated based on what would be the nonprofit’s
property tax if it were not tax-exempt suggests a strong link between
PILOTs and taxes. While PILOTs do provide much needed funding to
Boston, the revenue they brought in during 2010 accounted for only around
one percent of the city budget.239
The Boston Museum of Fine Arts (“MFA”), arguably a superstar
231. KENYON & LANGLEY, supra note 7, at 22.
232. Id. at 22–24 (illustrating that the previous program was quite random, an example
being that Harvard University paid a PILOT of close to two million dollars while Boston
College gave a payment close to three hundred thousand dollars).
233. See id. at 23 (stating that Boston has pursued museums in its recent requests for
PILOTs); Pilot Task Force, CITY OF BOSTON (2009), available at
http://www.cityofboston.gov/assessing/pilot.asp (stating that most of Boston’s tax-exempt
educational and medical organizations contributed PILOTs pre-2009).
234. Pilot Task Force, supra note 233.
235. KENYON & LANGLEY, supra note 7, at 29, 38; see also Shaines, supra note 213, at
219 (noting that Boston’s revised program will be implemented over five years).
236. KENYON & LANGLEY, supra note 7, at 38; Shaines, supra note 213, at 219.
237. KENYON & LANGLEY, supra note 7, at 41; see also Cooke, supra note 6, at 13
(stating that such discount credits will be offered to organizations that positively impact
Boston residents and not those that indirectly benefit the city through tourism).
238. Malcolm Rogers, Don’t Kill the Goose, ART NEWSPAPER (Jan. 2012), at 214.
239. KENYON & LANGLEY, supra note 7, at 22; Rogers, supra note 238 (pointing out that
this small amount of the annual budget did fully cover snow removal costs for the year).
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museum, had been making payments since 1988, but started to push back
due to the suggested increase in voluntary contribution.240
The MFA made
a PILOT of $55,000 to the city in 2010/2011, but in 2012, the city
requested an increased payment of $250,000, increasing to $1,025,000 by
2016.241
Likewise, the Institute of Contemporary Arts was asked to pay
$17,000 in PILOTs in 2012, but was informed that the fee would increase
to $86,000 by 2016.242
Museums have voiced frustration about being
excluded from Task Force discussions regarding PILOT amendments due
to the considerable effect the amendments have on cultural institutions.243
In Boston, disgruntled museums have argued that as nonprofit entities that
generate social services and income for the city, “there should be
investment in the arts, not taxation.”244
Though the requested $250,000 contribution is only a small
percentage of the MFA’s total revenue, it is money that is likely to be
diverted from programming, salaries, or growth.245
Furthermore, there is a
fear that the increased PILOT payments will harm donations, as
philanthropists may be deterred from donating if they believe their money
is used for PILOTs and city services rather than directly supporting the
museum.246
The city, in its quest to tap all sources of revenue, may
overlook the fact that the current economic environment negatively impacts
museums as well as municipalities, and, by further squeezing museum
budgets, the city indirectly may reduce museum services and jobs for
Boston residents.247
If museums were to reallocate funds toward the
payment of PILOTs, other museum spending would need to be cut,
240. Rogers, supra note 238
241. Id.
242. Cooke, supra note 6, at 13.
243. Id. (highlighting that since PILOTs are technically voluntary payments negotiations
are critical to their success).
244. Id. (citing the director of the MFA).
245. See Eric Weinberger, What the MFA Owes Boston, Why the MFA’s Director
Should Stop Complaining About the City Looking for Money and Start Opening up His
Wallet, THE BOSTON GLOBE, Feb. 19, 2012, http://www.bostonglobe.com/magazine/2012/0
2/19/what-mfa-owes-boston/fEpIUXJLl03YJCr1rXDweI/story.html (citing the MFA
director’s speculations over how the $250,000 would cost the museum employees and
programming).
246. See Rogers, supra note 238 (noting that the MFA is a fiduciary of the public trust,
as are many museums, and that donations therefore are made with the intent that they
provide for a certain benefit); NSFRE, supra note 82, at 2 (citing the NSFRE’s worry that
philanthropists will change their donating patterns if they realize that their funds are going
toward PILOTs).
247. See, e.g., Weinberger, supra, note 245 (noting that the MFA believes that having to
pay increased PILOTs will have a negative effect on other services that the museum
provides); NSFRE, supra note 82, at 2 (noting that PILOTs may cause nonprofits to raise
their prices for services or reduce services provided).
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admissions fees would need to be raised, or more attention would need to
be given the more commercial aspects of museum operations.248
Malcolm
Rogers, director of the MFA, stated “the PILOT scheme will simply mean
cuts in [the museum’s] outreach programs and a reduction in jobs.”249
There is a concern that if the Boston program is successful in
implementing this broad and formal expansion of PILOTs, many other
large municipalities will follow suit.250
Museums are closely monitoring
the situation in Boston, and there is hope that Boston museums will
negotiate a more favorable PILOT agreement with the city.251
B. Will Many Museums be Affected by Future Implementation of
PILOTs?
Nationwide nonprofits are concerned with the possible spread of
PILOTs. This makes sense—cities are not transparent in their application
of PILOT programs and PILOTs are not uniform since they tend to extract
different contributions from like institutions.252
However, the growth of
Boston’s PILOT program is not necessarily indicative of growth in other
cities, given that Boston is in a unique position that encourages PILOTs
due to its high concentration of high revenue-producing nonprofits that
own property.253
Although there is evidence that cities are increasingly
starting to explore the idea of PILOTs, cities may be unlikely to ask
museums for PILOTs, since museums are not the traditional PILOT targets.
Additionally, as noted, PILOT revenue covers a small percentage of city
expenditures; the effort and resources needed in negotiating PILOTs may
not be worth the PILOT revenue gained from most museums, which, if not
tax-exempt, would be subject to low property taxes (recalling that the
average savings for a museum from property tax exemption is $133,682
248. NSFRE, supra note 82, at 2.
249. Weinberger, supra note 245.
250. See Cooke, supra note 6 (citing a Boston City Council election candidate’s
suggestion that if Boston is successful with PILOTs other cities are likely to consider
PILOTs as an option as well).
251. Id. At the time this Comment was written, both the Institute of Contemporary Art
and the MFA are in discussions with the city regarding their PILOT fees, and there is
feeling that as a unified coalition more would be gained.
252. EVELYN BRODY ET AL., INSTITUTE ON NONPROFITS & PHILANTHROPY (Aug. 2012),
http://www.taxpolicycenter.org/UploadedPDF/412640-The-Charitable-Property-Tax-Exem
ption-and-PILOTs.pdf; KENYON & LANGLEY, supra note 7, at 3.
253. KENYON & LANGLEY, supra note 7, at 21–22 (noting that if taxed, universities and
hospitals alone would provide 24.6% of city property tax).
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and the median savings is $20,181).254
However, that does not mean that
museums will not be considered in expansions of existing PILOT programs
that are attempting to raise more revenue or equalize the use of PILOTs
across nonprofits.
Since Boston’s PILOT program expansion made headlines, other
cities have considered similar strategies to raise revenue. Philadelphia,
where PILOTs have been implemented for years but which has lost much
of its contributions, has refocused on its PILOT program.255
In
Connecticut, the city of Hartford has asked larger nonprofits to pay
PILOTs, and the city of New London requested increased payments from
hospitals and universities already paying PILOTs.256
In Massachusetts, the
city of Belmont has requested PILOTs amounting to $530,000 of
revenue.257
In New Jersey, several cities are organizing committees to
consider implementing PILOTs.258
In deciding whether to organize a PILOT program there are several
issues for municipalities to consider. PILOTs tend to be unsystematic and
lack consistent application.259
When implementing a PILOT program, a
city has to decide whether to have an extensive program like Boston's, or to
approach PILOTs on a case-by-case basis.260
Since nonprofits have no
legal obligation to contribute, it is important for municipalities to negotiate
with the nonprofits rather than simply impose payments.261
Negotiations
require investment of time and effort, yet funds raised from PILOTs
compose only a small fraction of city revenue, raising questions of
administrative efficiency.262
PILOTs may not be worth the cost of
implementation in most cities. If PILOTs are applied, they may make
sense only for nonprofits that own large, expensive, and currently untaxed
real estate, as is the case in the Boston program.263
Most cities support few,
254. Id. at 17.
255. How Philly Works: An Answer to Increased City Revenue? COMMITTEE OF
SEVENTY, http://www.seventy.org/OurViews_How_Philly_Works_An_Answer_to_City_Re
venue.aspx (last visited Apr. 8, 2013).
256. National Counsel of Nonprofits, supra note 180.
257. Id.
258. Id.
259. KENYON & LANGLEY, supra note 7, at 3; see also National Counsel of Nonprofits,
supra note 180 (detailing differences in state taxes, fees, and PILOTs).
260. KENYON & LANGLEY, supra note 7, at 38.
261. Id. at 3 (noting that individual negotiations are ideal when there are few nonprofits
worth asking for PILOTs, and a more uniform program is best in cities with more
nonprofits).
262. Id. at 22 (citing that Baltimore receives 0.33% of its budget from PILOTs, Boston
receives 0.66%, Detroit receives 0.17%, Pittsburgh receives 0.89%, Providence receives
0.56% and New Haven is at the high end receiving 1.16% of its revenue from PILOTs).
263. Id. at 22.
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if any, such nonprofits, and museums make up a small portion of the
nonprofits that fall within this category.
The success of PILOTs in Boston is based largely on the fact that
Boston supports many nonprofits, particularly large educational, medical,
and cultural institutions with expansive tax-exempt property.264
PILOTs
are found most beneficial to cities that rely on revenue from property
taxation and also have a large portion of their property wrapped up in
nonprofit activities.265
Additionally, hospitals and educational institutions are more likely to
be targets of PILOT programs than museums.266
These types of
organizations have traditionally paid the bulk of PILOT revenue, and will
most likely be the organizations further impacted as PILOTs expand
nationwide.267
Hospitals represent a much larger portion of section
501(c)(3) revenues, as 40.2% of nonprofit revenues are from hospitals, and
only 2.1% are related to the arts, culture or humanities.268
Hospitals and
higher education institutions also own over 40% of nonprofit assets,
compared to museums, which, along with other cultural and humanities-
oriented nonprofits, own only 3.1% of nonprofit assets.269
In cities
considering implementing or expanding PILOTs, museums are less likely
to be approached for initial PILOT requests than hospitals and universities
mainly because museums represent a smaller portion of landowning
nonprofits.270
Only 44% of museums own real estate, compared to 62% of
264. PILOT TASK FORCE REPORT, MAYOR’S PILOT TASK FORCE: FINAL REPORT &
RECOMMENDATIONS 6 (2010), available at http://www.cityofboston.gov/Images_Docu
ments/PILOT_%20Task%20Force%20Final%20Report_WEB%20_tcm3-21904.pdf.
265. KENYON & LANGLEY, supra note 7, at 3; see also Pilot Task Force, supra note 233
(noting that property tax revenue makes up sixty-four percent of Boston’s budget); Daphne
A. KENYON & ADAM H. LANGLEY, THE PROPERTY TAX EXEMPTION FOR NONPROFITS AND
REVENUE IMPLICATIONS FOR CITIES 4 (2011), http://www.taxpolicycenter.org/Upload
edPDF/412460-Property-Tax-Exemption-Nonprofits.pdf (noting that a study has estimated
the amount of land cities have wrapped up in property owned by tax-exempt nonprofits and
has stated that the following cities have the highest percentage of tax-exempt property:
Philadelphia, Boston, Baltimore, New York City, Denver, Columbus, Portland, Fort Worth,
Charlotte, San Francisco, Seattle, Jacksonville, Washington, D.C., San Jose, Houston,
Dallas, Los Angeles, San Diego, Phoenix, Nashville, Tucson, El Paso, and Memphis).
266. See BRODY ET AL., supra note 252, at 4 (explaining that nonprofit hospitals and
universities are the most at risk for expanding PILOT programs, and have been the most
often targeted for PILOTs, largely because of their vast real estate holdings).
267. Id. Nonprofit hospitals are seen as particularly uncharitable due to their close ties
to for-profit institutions like insurance companies and pharmacies. Id. at 4. They also suffer
a perceived likeness to for-profit hospitals. Id. at 4.
268. KENYON & LANGLEY, supra note 7, at 5.
269. Id.
270. Id.
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higher education institutions and 70% of hospitals.271
Additionally, the
estimated foregone property tax revenue from the average museum is only
$133,682, which is low when compared to $1,736,467 for hospitals and
$1,477,483 for higher education organizations.272
Cities considering PILOTs for museums must acknowledge the
negative impact increased PILOTs would have on the community. In order
to pay city PILOTs, museums would likely have to reduce public services
and programming, raise admission fees, or decrease local employment, as
the MFA is now considering.273
Cities considering PILOTs would also be
faced with strong resistance from museums that provide measurable and
positive economic impacts on the cities.274
If a museum can quantify its
economic benefits and illustrate why it should not have to contribute
toward municipal services, it may have a better chance at resisting PILOT
requests.
Cities are increasing their search for untapped sources of revenue, and
PILOTs are a way to do so without agitating too many voters.275
Although
museums are unlikely to be approached in a city’s first round of PILOTs,
they should prepare themselves for related pressure and scrutiny.276
If
Boston successfully raises funds from its reformed PILOT program, many
more cities are likely to explore PILOTs, and the museums most likely to
be pushed into negotiations are superstars with land wealth as well as
commercial activity.277
As noted by Professor Brody, cities are asking for
271. Id. at 17.
272. Id. Note that the median museum’s tax savings from property tax exemption is
$20,181, and that a few wealthy organizations are able to largely impact the average,
suggesting that perhaps those few museums (the superstars) may be individually targeted for
PILOTs.
273. See Weinberger, supra note 245.
274. See, e.g., Cooke, supra note 6 (discussing the MFA and Institute of Contemporary
Art as pushing back slightly and requesting further discussions regarding PILOTs before
paying the suggested amounts).
275. See KENYON & LANGLEY, supra note 7, at 3 (noting that PILOTs are best for cities
in which city residents end up supporting nonprofits). It can be assumed that a straight tax
increase to cover growing city operating budgets would not be considered favorable to local
taxpayers. Cooke, supra note 6, at 13.
276. See KENYON & LANGLEY, supra note 7, at 9 (“[C]ity fiscal conditions typically lag
behind economic conditions by about two years, many municipal officials expect budget
shortfalls to worsen through 2012.”); see also id. at 7 (noting that PILOTs are related to the
pressure on nonprofits and the effort of cities to find ways to meet their budgets). While the
economy remains unstable, cities are likely to continue to search for new revenue streams,
which implies that nonprofits are likely to be pressured to prove their deservedness of tax
exemption.
277. See, Cooke, supra note 6 (citing a local politician as speculating that PILOTs will
be mimicked by other cities if Boston is successful with the program); see also KENYON &
LANGLEY, supra note 7 (noting how wealthy land owning museums pull up the average of
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proof of community benefit in return for tax exemption, and are supporting
property tax exemption on a quid pro quo rationale.278
Thus, museums
should preemptively prepare for PILOT negotiations by compiling
measurements of community impact and pushing for clear and specific
formulas to calculate PILOT fees.279
Museums should also highlight the
benefits they provide such as: the indirect positive effects on the tourism
industry, the public nature of museums, the protection and preservation of
historical and cultural pieces, and most importantly, the provision of
education and learning. For museums, cities may be convinced of their
positive economic and educational impact and consider it unnecessary to
appropriate funds that would otherwise benefit the community through
reinvestment in the museum.
CONCLUSION
Museums are increasing their focus on profit-making activities and
have begun to operate as commercially savvy institutions. However, their
often large untaxed revenue streams and property wealth make superstar
museums easy targets for changes in tax exemption at the state level and
requests for PILOTs at the local level. Federal tax exemption rests on
strong policy motivations to provide support for the arts as is the norm in
developed nations. At the state level, tax exemption is less of a rule, so is
more easily manipulated by public sentiment and economic stress. Thus,
museums should be prepared for challenges to their commercial activities
and calls for state legislative action on nonprofit tax laws. The growing
popularity of PILOTs at the local level also suggests that public perception
of nonprofits is changing.
Museums are increasingly criticized for their commercially-oriented
governances. To avoid tax policy changes at the local level, and challenges
to federal and state tax exemption, museums face the burden of shifting
public perceptions of the benefits they provide to society. In order to
weather the storm of criticism regarding profit-seeking activities, museums
must do more than enlighten the public on culture, art, science, and history.
Museums must also educate and remind visitors, their communities, and
the nation at large, of the critical role they serve the general public as
educators and custodians of our past, present, and future.
tax savings for museums considering the average savings is $133,682 while the median
savings is $20,181).
278. Brody, supra note 167, at 4.
279. See Anderson, supra note 179 (illustrating ways in which museums can measure
success and impact).